As recession threatens the UK accountants tell businesses not to panic

Accountants across the UK are urging clients not to “panic”, despite new data from the Office for National Statistics reinforcing the threat of an impending recession.

On August 12, the ONS announced a 0.1% drop in quarterly GDP figures, cementing fears of an impending recession later this year.

The Institute of Chartered Accountants in England and Wales (ICAEW) has predicted that a winter recession is “unavoidable”, but accountants are aware there is a risk of the sector talking itself into a slump.

Dominic Bourquin, head of the tax consultancy and corporate finance team at Monahans, said it was “too early” to predict a recession as some economists have already done and it was imperative for businesses to “stay calm and not panic”.

“The fall in the service sector was caused by a drop off in coronavirus related health activity, which you would expect as the virus recedes, so let’s not talk ourselves into a slump,” he says.

Over the past three months exports fell, and consumer spending contracted to nudging the UK closer to a period of contractions the Bank of England (BoE) expects will last until the end of 2023.

According to the ONS, the dip in output in the second quarter followed 0.8% growth in the first quarter and was driven by the health sector, as the Covid vaccine program slowed down, and retail as household spending fell.

Unavoidable winter recession

“The UK economy is sliding closer to recession and the worst is yet to come,” said Suren Thiru, Economics Director for ICAEW.

According to Thiru, business investments are still short in comparison to pre-Covid levels. Firms are being left with little headroom to invest due to soaring costs, which is restricting the UK’s ability to list productivity.

“The economy should rebound in July, but the speed at which spiraling energy bills and inflation are devastating people’s incomes means that a winter recession looks unavoidable. With these headwinds increasingly limiting firms’ ability to operate and invest, the downturn maybe more painful than the Bank of England predicts.”

“Against this backdrop, the case for the Monetary Policy Committee shifting gear on interest rates to a more moderate pace of monetary tightening is only likely to grow,” said Thiru.

Too early to panic

Accountants across the sector, however, are attempting to communicate a less pessimistic – while realistic – picture to their clients.

Bourquin warned against “an over-reaction” and suggested a slump in some sectors were easily explainable and naturally occurring.

He commented that there was “a real mixed bag” and definitely “some bright spots” behind the headline figure of 0.1% drop.

“Overall, I am sure the Government and all of us would have much rather seen an increase in GDP, but when the reasons for the fall are examined and we remind ourselves that these are early estimates subject to revision, there is no need to panic yet – they might be indicators of the start of a trend that leads us to a recession, but then again, they might not,” he said.

Bourquin added that an in-depth look at the figures showed the economy was recovering from the Pandemic, which was “surely a good thing”.

The service sector, which is the largest sector of the UK economy, shrunk by 0.4% in the quarter. This is likely due to a fall in ‘health and social work’ activities caused by a reduction in vaccinations and track and trace activities.

Graham Seddon, co-founder of Altitude Accounting, believes it is not a lack of demand that is causing any problems, but rather supply chain issues.

“Most of our clients are experiencing growth in their revenues, they are suffering cost pressures, but the demand is still there. We are definitely heading for a technical recession; I can’t see how we are going to avoid that. However, the impact on SME’s is limited at the moment, I have not seen any slowdown,” says Seddon.

Financial crisis veterans

Several accountants are also aware of their own client’s resolve – many of them having weathered challenging financial conditions in the past.

Bryn Reynolds, tax principal at Simmons & Simmons, has found clients have shown an “increased wariness” at the economic situation, but not “panic”.

He notes a large share of his clients are “veterans of the financial crisis”, while others have faced more recent turbulence when weathering the pandemic years.

“By contrast the current situation is viewed as concerning but not to the same order of magnitude and certainly not existential,” says Reynolds.

He notes there is a consensus that the worst of the impact will hit specific industry sectors, many of which have already been under pressure over the past two years. These businesses, Reynold says, are having to rethink their strategic priorities as a result.

“There is a trend of non-essential ‘post-Covid’ growth strategies being deferred until the timing is more opportune. That is across both strategic acquisition plans and recruitment,” he says, acknowledging many of these plans were in their early stages.

“We are seeing an increasing focus on the cost agenda, ESG considerations and adjusting for the changes to working patterns engendered by Covid. Internal priorities rather than external opportunities,” Reynolds says.