UK companies weather recession as spending slows and costs soar

British companies are bracing for a recession this year as they face the dual effects of slowing consumer demand and accelerating inflation-driven costs on their business.

Many companies told the Financial Times they have begun “warning” for the recession in recent weeks, with some tweaking their medium-term plans during periods of no or low economic growth.

Online used-car seller Cazoo was one of the first to specifically warn of the threat of a recession last month, forcing it to cut hundreds of jobs. Shares of fast-fashion makers Asos and Boohoo plunged after they revealed soaring product profits and warned of the impact of inflation.

Bosses say they have seen signs of a slowdown, especially at retailers, due to the impact of rising costs on consumers. E-retailer Currys has slashed its profit forecast this week, while rival AO has raised £40m which its chief executive describes as “a sensible part of its management”. financial management in the context of macroeconomic uncertainty in the short term”.

Stuart Rose, former head of M&S and a Conservative counterpart, warned that British businesses need to brace themselves during a difficult period. “Most companies see inflation coming. They have strengthened their balance sheets, taken the appropriate measures and will now be profitable. We will get through this.”

An executive of a leading supermarket chain said many people are waiting to do their monthly shopping around payday. Other shoppers have asked cashiers to stop at a certain limit – £30 or £40 – to limit spending.

This makes it difficult for the chain to decide on orders for larger fare items, such as clothing or electrical goods, he added, with questions about how demand will pick up in the fall.

The supermarket owner describes September as a “coming to Jesus” month – when spending on new uniforms and school supplies coincides with an end to holiday spending and soaring energy costs. .

The group is currently ordering fewer items for the fall-winter season due to uncertain demand, said the chief financial officer of a listed clothing company.

Line chart of Headline CPI, year-over-year, % shows inflation in the UK is forecast to continue higher than in the US or euro area

Many other companies that depend on discretionary spending, such as travel and entertainment groups, are also likely to be hit hard as the golden age of post-pandemic spending is expected to come to a halt. after summer.

Media and marketing teams are also seen as one of the more cyclical parts of the economy, with advertising and related industries in TV and radio quickly taking a hit as marketers cut back spending during previous recessions.

Martin Sorrell, executive chairman of digital marketing team S4 Capital, said the company has “constantly reviewed our revenue forecasts to make sure they are on point” in light of changing economic conditions.

Sorrell expects a cyclical recession in parts of the world later this year or next. “It is not a deep problem but it will take time to reduce or change. The global recession is at the top of everyone’s agenda. Everyone has to plan for a tough 2023. Now you have to focus on growth and where you can find it geographically and technologically over the next two years. “

Other City bosses – from Aviva’s Amanda Blanc to Fidelity International’s Anne Richards – have also told the FT that they are concerned about the growing risk of a recession.

High inflation but high employment

The CBI has warned that the government has just weeks to change the direction of the UK economy, with a recession now a “huge risk” as household spending dips.

“Everybody knows that this year will be very difficult. Rain Newton Smith, chief economist at CBI, said.

The latest data on gross domestic product shows that the economy has slowed down faster than economists expected, while business confidence has plummeted in recent months. Analysts have slashed earnings forecasts for next year for the UK, Europe and the US, with some predicting a fall in profits and wide-ranging warnings in the fall.

The continent-wide Stoxx 600 index is forecast to post flat earnings next year, which, according to Goldman Sachs, was recently cut from 5%, with a similar outlook for the UK.

These overall numbers include relative strength sectors such as oil and gas, which are benefiting from commodity prices.

According to analysis of past recessions by Goldman Sachs, earnings typically fall about 30% across listed companies. The worst recession in recent times was the 2008 financial crisis when earnings fell by 50%, but the bank doesn’t expect that to happen again, according to Sharon Bell, a portfolio strategist. UK private.

“At that time we had a financial imbalance, the corporate sector was heavily indebted, the banking sector was not well capitalized and even households were quite stressed.”

Peel Hunt said this recession could be unusual given that high inflation would have a “significant impact on disposable income” but also lead to high wage and employment growth.

Hard Christmas

Goldman suggests that the hardest hit companies are usually travel and entertainment. “This is what people cut first, pointing to a combination of higher rates, lower savings, and higher costs due to cap rising energy prices and other inflationary factors,” says Bell.

“All of that will happen at Christmas. The first quarter results of the season were good. The second quarter will probably also be fine. Real success will be more likely to happen in the third or fourth quarter of this year.”

Peel Hunt similarly warned about consumer-related areas in the hospitality sector, where it could be easier to cut spending.

“If consumers are going to ease their sadness in the next recession, the hospitality industry will have to work even harder to win over their customs,” it said in a note indicating much of the Drinking is currently happening at home.

“Overall, the economic picture looks bleak for consumers over the coming winter, with the impact of inflation disproportionately affecting lower income groups.”

Real estate and construction services have been hit harder than in previous recessions, with rents and capital values ​​trending towards economic growth and construction dependent on demand for housing. new.

The least cyclical includes health care, utilities, tobacco, and consumer staples, such as basic food.

“People can trade their groceries, but they will still buy them,” Goldman’s Bell said.

“Everybody has to eat,” added one supermarket boss, who noted that consumers are starting to turn to branded foods and predicting sales of more expensive clothing and electronics will be difficult. more difficult.

But even food manufacturers and retailers that are typically resilient during periods of lower consumer demand will be hit by pressures on both volumes and margins from rising food inflation. strong, according to Peel Hunt.

Tesco and Sainsbury’s have indicated they expect lower profits this year as they absorb some of the price hikes to keep costs down for shoppers.

Pointing to beverage makers such as AG Barr and Britvic, the broker said such strong brands would benefit as consumers split between premium and value, with the average being squeezed.

However, it does indicate that the Fevertree beverage mixer is likely to “get some pressure during the downturn”.

Banks appear to be more flexible now than they were in 2008. At a time of near full employment in the UK, there was little sign that people were having trouble paying their mortgages, while interest Increased productivity can also help their business.

However, RBC Capital said senior banks could still be affected if consumers face a “triad of higher food, energy and mortgage costs” during a recession.

While sectors like telecommunications and utilities are heavily indebted, they are also seen as strong and largely essential cash generators. Meanwhile, the pet-locking boom could also bolster sales in the pet-care sector.

“Most consumers prioritize their pets over spending on themselves,” according to Peel Hunt. “We always thought the last three things to ‘go’ in a recession were signing up for Sky Sports, a new monthly trainer pair, and the dog.”

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