Stoy survey warns downturn will be worse than 1990s

Businesses across the UK are seeing their order books collapse and now expect the current downturn will be worse than the recession of the early 1990s, the latest Business Trends report from accountant and business adviser BDO Stoy Hayward said yesterday.

The report's Output Index, which is a measure of order book strength and short-run turnover forecasts, has fallen from 91.3 in November to 89 in December. The index is scaled so that 100 equates to trend annual growth of 2.5%, 110 equates to the late 1980s boom and 90 equates to the trough of the previous economic cycle in 1991.

The fall below the 90 mark signifies that businesses now expect this downturn to be worse than the recession of the early 1990s.

The report said the UK manufacturing sector is already deep in recession, with a 1.6% contraction in the third quarter. Service sector output dropped by 0.5%, while construction output fell by a surprisingly modest 0.2%.

The survey predicted that unemployment will rise during the next three months as businesses shed staff as a cost-cutting measure to help them survive the slump.

Neil Craig, managing partner at BDO Stoy Hayward in Scotland, said: "With order books for UK businesses collapsing and volumes for the next quarter rapidly diminishing, businesses now have concrete evidence that the downturn will be worse than it was in the early nineties.

"The reality is that things are now very tough indeed. And while in the current environment many businesses need all the help they can get, with interest rates already so low further reductions in interest rates will help little. The key focus of public policy now has to be to improve substantially the flow of credit to UK businesses by whatever means are available."

Commenting further on Bank of England monetary policy, the report stated: "The Bank of England Monetary Policy Committee delivered a further 100-basis point interest cut in December, taking the base rate to 2%. With the economic crisis only at its initial stages and high inflation no longer an issue, we are almost certain to see interest rates hit record lows in 2009. At this stage it is unclear whether the Bank will adopt a wait-and-see strategy in January or deliver another large interest rate cut.

"There are advantages to waiting to see what further developments occur in the markets following the collapse of sterling in December. However, with interest rates at such low levels their usefulness as a policy tool is increasingly limited."

The MPC began its January meeting yesterday and will announce its latest decision on base rates at noon today.

The Business Trends report is compiled by taking a weighted average of the results of all the UK's main business surveys carried out between November 25 and December 25, 2008. Taken together, the surveys cover more than 11,000 different respondents from companies employing approximately five million people.

The BDO Stoy report will provide grim reading for Chancellor Alistair Darling, who warned yesterday that the UK was "far from through" the recession, raising speculation that he will be forced to ditch his forecast that the economy will improve later this year.