Insight Analysis: Is The UK Economy About To Tumble?
There has been a flurry of speculation over recent months about a knock-on effect of the US economic slowdown for the UK and the rest of Europe. Certainly media companies are starting to tighten their belts, if only as a precautionary measure.
In the States a number of media companies have issued profits warnings or seen their financial results come in below par and have blamed this on a broader economic retardation. The publishers particularly have felt the chill, with the New York Times Co. and Dow Jones – publisher of the Wall Street Journal – each issuing profits warnings and cutting jobs in recent weeks (see US Publishers Cut Jobs As Ad Revenue Slows).
However, countering this there are a number of companies that are doing quite well, thank you very much.
Global advertising group Omnicom recently posted a worldwide revenue increase of 16% (see Omnicom Shows Strong US Growth In Q1 Results); European media group Vivendi showed revenues up 10% and ABN Amro said it was defensively placed against any slowdown anyway (see Vivendi ‘Defensive’ Against Ad Slowdown). The world’s largest media company, AOL Time Warner turned in Q1 revenues up 9%, ahead of Wall Street expectations, and said that it remains confident to achieve its targets for the coming year.
The IPA’s recent Bellwether Report – which tracks the behaviour of 300 UK marketing departments – has shown that marketing spend is on the increase, irrespective of forecasts for a downturn (see Forecasts).
Much of the visible slowdown in ad revenues, at ITV for example (see ITV Ad Revenue Shows Further Decline In Q2), is a result of difficult comparisons with the dotcom marketing boom period of last year, not necessarily an indication of a broader economic problem.
Given the retraction in the US, companies with strong ties to the market there will be likely to feel a bite; or, at best, they will become worried of a bite and temper their business plans accordingly. This fear in itself can be a catalyst to slowdown and, potentially, recession.
According to data from Reuters’ purchasing managers index (PM), European manufacturing growth has been tangibly hit by the US economy, falling almost to a standstill last month.
Furthermore, if enough US companies continue to turn in falling profits, Wall Street will react negatively. Since the London Stock Exchange is very sensitive to the movements there, it too will tumble exacerbating the whole situation in the UK and across Europe.
If Europe can remain resistant to dips in the US, the UK has a better chance of strength itself, given that half of UK exports are to Europe.
The feeling amongst those in the know, is that the UK economy is currently in a much stronger position to weather any downturns than the US economy.
Whilst some sectors will be hit harder than others – and companies with substantial assets in the US will inevitably feel the squeeze more strongly – the economy as a whole is not looking too fragile. Its continued stability, though, may require a little more confidence.