W hen I wrote the economic outlook for last year’s PrintWeek Top 500, little did I – or indeed anyone else – know quite what an incredible 12 months it would be. For last year’s forecast I wrote: "Going forward, the outlook is less rosy. 2008 promises to be more challenging than 2007."

Quite. Could anyone have predicted just how much prospects would change in the course of 12 months, not only for the UK economy but around the world as well?

Like a glacier scouring a mountainside, the credit crunch has redefined the financial landscape. Famous names in banking, with pedigrees more prestigious that a Crufts winner, have gone out of business, been nationalised or seen themselves rescued for a pittance. Governments – or more accurately taxpayers – around the world have spent untold billions bailing out financial institutions that were seen as the bedrock of modern economic systems.

The latest data shows that the US economy contracted in the third-quarter of 2008, the first decline since 2001, and that US consumer confidence is at its lowest level in the 41-year history of the Conference Board’s survey.

Recession – two successive quarters of GDP contraction – seems inevitable. In addition, business and consumer confidence is plunging across the Euro Zone. Its economies are either in recession or on the verge. Further afield, growth in China and India remains positive, but it is slowing. In China, growth has slowed to single digits for the first time in four years.

All this is a far cry from this time last year when the world economy was enjoying robust growth. But, some alarm bells were already ringing. When the credit crunch first hit the headlines in the summer of last year, and even after the collapse and nationalisation of Northern Rock, most experts fervently believed (or hoped) that the fallout in the UK would be contained within the property, construction and financial markets. Specifically, they forecast that the credit crunch would be a monetary phenomenon and would not affect the ‘real’ economy: output and jobs.

Now it is clear how vain these hopes were. The housing and construction markets have collapsed, causing thousands of redundancies, and consumer confidence has slumped. The UK economy has slowed dramatically over the past 15 months, from posting impressive quarterly growth of 0.8-0.9% to experiencing its first downturn since early 1992 in the third quarter of 2008.

An extraordinary 63 successive quarters of growth ended with a worse-than-expected contraction of 0.5%. All sectors contributed to the slowdown. If, as expected, the economy contracts further in this quarter (October-December), the UK will officially be in recession.

There are two schools of thought about how long a recession might last: short and shallow against long and deep. It is easy to argue for either scenario. Optimists can point to the fact that inflation has probably peaked already, that interest rates have been cut dramatically and will be cut further and that the sources of our present difficulties have been addressed with the massive bailout. Pessimists could counter that this recession has taken not only the UK, but also the global economy, into uncharted waters.

Uncharted territory
A financial meltdown on this scale is unique and as a result it will take time for the banking system to regain its confidence and begin to lend again on a scale required to stimulate growth. Following growth of around 1% this year, the Treasury consensus is for zero growth in 2009. The range among the 40+ forecasters is wide, from –1.9% to an outlandishly optimistic 3%.

As recently as May, the average of independent forecasts for GDP growth in 2009 was 2%. In the current environment of huge uncertainty, and even with this month’s huge cut in interest rates, business planners would be well advised to err on the side of caution.

Only a little more than a year ago interest rates stood at 5.75% and the debate was whether 6% would be high enough to take the sting out of rising inflation. While the collapse of Northern Rock moved the goalposts, the Monetary Policy Committee (MPC) was slow to cut rates.

Three reductions over the winter and spring took rates down to 5% in April, but then the fear of a surge of inflation kept them unchanged until October when, as part of a coordinated worldwide attempt to calm markets, the MPC reduced rates by 0.5%, the first cut of more than 0.25% since 9/11 in 2001 (see interest rate graph, p6). With the economy now in retreat and inflation having peaked, the MPC had plenty of scope to reduce rates further. However, the cut of 1.5% at the November meeting took the markets by complete surprise, as it was the biggest reduction since 1981. Since further cuts are expected in the first two months of next year, rates could fall into uncharted territory.

At 3%, they are already at their lowest level since 1954 and might even test the all-time low of 2% if the economy does not react favourably to the October and November doses of medicine. Unlike in October, and with some gentle persuasion from the Treasury, the banks have begun to pass on the reduction to their customers. The Treasury consensus forecasts will have to be rewritten, as they predicted a fourth quarter 2009 average of 3.5%.

The Consumer Prices Index (CPI) rose by 5.2% in the year to September (the October figure was published after the Top 500 went to press), the highest for more than 16 years, and more than two and a half times the target level of 2% (see inflation graph, p6). The Retail Prices Index (RPI) went up by 5% over the same period. The CPI in particular has risen sharply in the past year, having stood at just 1.8% in September 2007. Soaring oil prices and rocketing food and non-oil commodity prices were largely to blame. The September figures for both CPI and RPI probably represent peak levels.

With the economic downturn well underway around the world, oil prices have fallen to around $60-70 a barrel, and there have been similar, if less spectacular, falls in food and non-oil commodity prices. The Treasury panel forecasts fourth-quarter 2008 inflation of 4.6% for CPI and 4.5% for RPI falling to 2.1% for both in 12 months’ time. Some have suggested that inflation could be down to around 1% or even lower by next autumn if oil, food and commodity prices fall further than currently predicted. A prolonged and deep recession could make deflation a real possibility in the UK.

Sterling, like stock market indices, has fluctuated wildly on a number of trading days in the past couple of months. In normal conditions, it might move by fractions of a US cent, but in recent times daily movements of up to four cents have not been uncommon and most of the movement has been downward. From a peak of around $2.10 last November, sterling touched a six-year low of $1.55 in late October, a fall of 26%. Currency traders are anxious about the state of the UK economy and feared, correctly, that there could be large cuts in UK interest rates compared with the US, where the Federal Reserve rate is already down to just 1%. Sterling’s fall against the euro in the past year has been less precipitous at 10%.

However, the downward movement continues a long trend that has seen sterling fall from around €1.70 in October 2000 to €1.27 in November. The Treasury panel forecast that sterling’s trade-weighted index, a figure calculated against a basket of currencies important to UK trade, will be relatively stable between the fourth quarters of 2008 and 2009. As economists often say, time will tell.

Downward direction
Recession is not a new phenomenon for the print industry, which has experienced regular bouts of boom and bust, mostly bust, since the millennium. Yet, 2008 started on an upbeat note, with the January BPIF Directions survey headline reading: "Happy Christmas and guarded optimism for the New Year – years of rationalisation begin to pay dividends." The survey noted that the percentage of firms saying that order books were better than normal for the time of the year was the highest since April 1997, that the positive balance for selling prices was the best since January 1996 and that the positive balance for margins on sales was possibly the best in the 25-year history of the survey. Rationalisation had indeed paid dividends.

The mood of optimism was captured in the April headline, which read: "Print industry believes it can defy economic slowdown – year-on-year improvements in volumes and margins forecast." The improvement in margins reported during the quarter and forecast for the coming quarter was largely the result of efficiency gains and, in some instances, volumes being gained from companies that had failed. However, it was also noted that the industry had been unable to fully pass on the increases in costs incurred during the quarter.

Pressure intensifies
A new dawn had broken three months later with the July headline: Conditions toughen as costs surge – coming three months offer no respite. The quarter had been most disappointing and the percentage of firms working below capacity stood at 87%, the highest percentage for five years. Moreover, just 16% of firms reported order books better than normal for the time of the year, the poorest figure since July 2001. Worse still, the survey commented that rarely had the industry been under such intense pressure from rising costs.

The 100th and last-ever edition of Directions in October featured the depressing headline: "Downturn in economy impacts severely on print industry – Christmas should provide brief respite." The quarter provided the highest negative balance for the general state of the trade since April 2006 as well as several other discouraging negative balances. Not for the first time, the survey commented on the polarisation within the industry, noting that as some companies were going from strength to strength others were closing.

The survey also revealed that an estimated 1% of the industry’s workforce were likely to lose their jobs in the six-month period from June to November. If it had not been for the traditional upturn ahead of Christmas, it was surmised that the survey could have been one of the bleakest in recent times.

The last survey was conducted during the first two weeks of September, before the tumultuous events of the collapse of banks in the US, UK and Europe and before official statistics confirmed that the UK economy was contracting. A snapshot today would reveal a considerable further loss in confidence and much greater trepidation about future prospects. Undoubtedly, the UK economy and the print industry face as difficult a coming year as any since the early 1990s. But, as all good things come to end, so will the present malaise.