It looks as though trouble is brewing in the world economy in 2008 ­right?
There are many areas of uncertainty ­ not least how the present credit crunch plays out ­ but, overall, the global economy (measured by GDP) is set to grow by 3.2% in 2008, according to the normally reliable predictions of D&B Country Risk Services.
But there’s a catch, says Darren Middleditch, economist at D&B. “This is predicated on our expectation that the US economy does not slip into recession as a result of the tightening of credit conditions. However, the risk of a hard landing is non-trivial and our relatively upbeat assessment could also face downside risks from the continuation of high world oil prices ­ though if the global economy were to slow markedly, demand for hydrocarbons would drop anyway, causing prices to fall,” he says.

So if US growth is slowing, where will expansion come from?
The Bric economies ­ Brazil, Russia, India, China ­ look set to continue their rise, although the conditions may not be as buoyant as in the recent past. China’s rampant growth rate may slip back from 11.7% to 9.8% in 2008, according to Middleditch. “Inflationary pressures will continue to mount and may lead to an eventual policy response in late 2008 that includes allowing the currency to appreciate more realistically,” he warns.

India’s economy may also have a tougher time. “Growth is set to moderate more markedly as a result of the impact of slowing industrial output and the negative impact of higher interest rates, slower global demand conditions and the strength of the rupee,” says Middleditch.

Some of the gloss may be knocked off Russia’s economy because of the slow pace of real economic reform. Even the buoyant hydrocarbons sector could face problems as inward investment has been discouraged by Russia’s tendency to expropriate assets that start to perform well. Meanwhile, Middleditch expects Brazil to continue to grow on the back of strong consumer spending.

So what does the global picture mean for the UK economy?
Britain has been relatively hard hit by the credit crunch. With tighter lending, there could be a knock-on effect on property. But Iain Hasdell, a senior partner at KPMG, takes an optimistic view. “I foresee the lack of volatility in UK interest rates and inflation continuing in 2008,” he says.

“This will provide a sound platform for all sectors of the economy that have growth plans. I expect to see significant growth in some of the UK’s emerging sectors ­ including the environmental technology field ­ complementing incremental growth in more traditional domains such as financial services. But manufacturing will continue to be a challenged area of the economy.”

Not every commentator takes such a sanguine view. “Debt levels are high and, with the ongoing uncertainty over interest rates, consumers will be spending less in 2008,” says Ryan Kneale, market analyst at BetsForTraders.com. “Major retail stocks will be hurting and many chains are tipped to extend their sales calendar and drop prices further to encourage consumer spending. The danger is that with stretched incomes and sky-high oil prices, consumers will be turning to plastic, plunging further into debt.”

The big question, though, is will the credit crunch continue into 2008?
Most commentators, including Ismail Ertürk, senior fellow in banking at Manchester Business School, agree there’s still more bad news to come from the banks hit by exposure to sub-prime lending. The question is what impact this will have on businesses that want to borrow in 2008. An autumn Deloitte survey of 51 FDs found that 50 of them agreed the crunch would reduce the availability of credit generally. But only 13 thought it would be a significant reduction.

If there is less liquidity in debt markets in 2008, there could be problems for some companies, warns Jason Green, a director a PricewaterhouseCoopers Corporate Finance. “The buoyancy in debt markets over the past couple of years has allowed some corporates and private equity firms to shore up poor performance through financial re-engineering. Debt markets will not be as buoyant in 2008 and borrowers with patchy performance and weak credit metrics will not be able to rely on increased borrowings as a ‘get out of gaol free card’.”

But Andrew Burrell, associate director at Experian, argues that after several years of good profitability and cost control, most firms’ balance sheets are reasonably healthy. “As a result, external finance is less of an issue than in the past for companies.

“A general slowdown in the economy is expected to curb the demand for corporate lending over the next year or so, but this is more down to weak demand and reduced rates of return, than a lack of available funds. The situation is not the same as the lending squeeze of the early 1990s when companies faced sharply plummeting demand, but were also in financial deficit and faced a heavy interest rate burden.”

Even so, it looks as though the heady days of merger and acquisition activity are over for a bit, doesn’t it?
The credit crunch may have slowed M&A, but it won’t stop it in its tracks in 2008, says Andre Sawyer, managing editor of mergermarket.com. “We saw a number of auctions put back to 2008 because the competitive tension isn’t in the market at present,” he says. “But I think that once the credit market resolves itself, you will see these auctions return, but largely in the mid-market ­ deals between £500m and £1bn,” he says.

Sawyer doesn’t believe there will be so much activity at the top of the market in 2008 because the private equity players, who had started to challenge trade buyers at this top level, can no longer command the debt leverage for deals of that size.
“With the absence of the PE community at the top end of the scale, you won’t get the same level of competitive tension and, therefore, prices will start to dr op. That doesn’t mean that M&A itself is finished ­ it just means that it takes on a different tack.”

Indeed, at the lower end of the market, there is a healthy appetite for deals. An autumn survey by Investec Private Bank, found that 37% of companies with turnover of more than £10m are either “likely” or “very likely” to take over another business during 2008.

Where does this leave hungry deal-makers in the PE community?
Facing a tougher 2008, but still doing some deals. “We will see fewer private equity deals,” says Iain Roache, managing director at EA Consulting Group. “FDs will have to go to market to raise funding ­ which is more exposure than the FD of a private equity company will be used to.”

But PwC’s Green thinks there will still be highly leveraged deals in 2008. “Companies with the right fundamentals - good cash flows, solid management, proven credit histories ­ will still be able to generate high gearing. However, banks will continue to be more cautious in their lending practices. There is an obvious parallel to be drawn with the consumer lending market here, as mortgage lenders shy away from the sub-prime market.

“You also have to remember that there is still a wall of money on the equity side. Much of the war chest raised by private equity houses over the past few years still needs investing, albeit deals will require greater equitisation.”

But the world of business won’t look so rosy in 2008 ­ for instance, what about high energy costs?
Continued growth from the Bric economies, especially China, is bound to keep prices high, most commentators agree. Bestfortraders.com’s Kneale believes it’s only a matter of time before the headline oil price breaches the totemic $100 a barrel.
Andrew Horstead, research manager at Utilyx, a provider of energy procurement and price risk management services, agrees. “The only question that remains is when, not if, the psychological $100 mark will be broken.”

This has implications for the way in which FDs manage corporate energy costs, Horstead argues. “With future price direction still far from clear, and with volatility expected to remain high, it has become more important for businesses to incorporate a robust risk management policy into their day-to-day management processes.”

What about currency shifts, especially the weak dollar?
It’s likely that the US dollar will continue its relative decline, says Simon Derrick, head of currency research at the Bank of New York Mellon. He argues that one of the driving forces behind US currency policy has been worries about the anti-inflationary stance of the Federal Reserve against a back-drop of higher energy prices.

He says: “With all the signs also indicating that the US Treasury remains comfortable with its currency policy, it seems likely that the dollar’s negative forces emerging since mid-August 2007 will build in intensity. Indeed, as long as this does not lead to a full-scale rout in US asset markets, it is arguable that US officials may even be quite happy with this outcome if it brings further pressure to bear upon those nations that currently peg their currencies or run ‘dirty floats’ against the dollar.”

But Mark O’Sullivan, at Currencies Direct, says: “Technically, the dollar looks much oversold and, with the rest of the US economy growing at about 3.8% a quarter, the news is not all bad. The fact that the American consumer has started spending more on US products than imports should add to the profitability of US companies so attracting currency flows from Asia and Europe.

“This, coupled with the fact that 2008 is an election year, means we could see the dollar rebound. However, nothing is a certainty and as the saying goes, 24 hours is a long time in politics ­ in the currency markets it is even longer.”

Where does this leave sterling and its implications for UK exports?
Tony Wilson, director of Travelex Global Business Payments UK, says that, while a quarter of UK businesses are bullish about the prospects for 2008, two-thirds plan to rein in their international trade. “With half of the UK’s businesses currently importing or exporting to North America, it is difficult to ignore the potential impact of any further fall in the price of the US dollar or slowdown in American consumer confidence beyond the Square Mile,” he says.

But not all pundits are convinced sterling will remain so strong against other currencies. Ryan Kneale says: “While sterling remains very strong against the dollar and that is likely to continue, in light of plunging banking stocks in the UK and with uncertainly over interest rates, many analysts view sterling as the next currency to collapse in dollar-like fashion. The sterling-to-euro rate is currently falling and with interest rates in the UK higher than in the eurozone, the euro is emerging as the currency of 2008.”

Can we expect to see the problem of pensions under-funding to be resolved in 2008?
There are likely to be further developments that FDs will need to keep a close eye on. The past few years have seen many pension fund trustees becoming increasingly restless about the funding of schemes.

“That pressure will continue to build in 2008 and FDs will see more trustees pushing for funding beyond FRS17 and some, depending on the circumstances, even targeting gilts-matched funding,” says Jonathan Land, a partner at PwC. “This raises the prospect of schemes having trapped surpluses as a result, with the associated negative impacts on accounting disclosure. To manage the demands of trustees, FDs should consider offering stronger covenants to trustees in return for lower performance targets and/or greater flexibility in the investment strategy.”
Land adds: “In 2008, we’re also likely to see an increase in the number of schemes being bought out in corporate transactions as well as insurance solutions. As the buyout market becomes more bullish, companies will want to investigate the price at which they will be able to offload the unquantified risk inherent in their schemes.”

And, on top of everything else, we’ll have to worry about becoming greener, won’t we?
Business’s green agenda is likely to strengthen during 2008 ­ and in the years beyond. “Sustainability is becoming a fierce competitive issue for certain sectors, particularly those with significant exposures to carbon, resource intensity, waste and supply chain labour issues,” says Justin Keeble, head of Arthur D Little’s sustainability and governance practice.

“European consumer attitudes are changing and will continue to manifest themselves in their buying attitudes. We are seeing this strongly again in high impact sectors such as automotive, where fuel efficiency has shifted other purchasing criteria to become first choice and domestic energy, where there has been a dramatic interest in green tariffs. We will see this extend to consumer goods and retail. Leaders such as M&S are already taking advantage of this.

“Carbon reduction commitments will also bite industry, especially those with significant energy exposure, but which are currently falling outside the European Union’s Emissions Trading Scheme (ETS). These issues will have a financial impact on the P&L and on shareholder value. FDs should start pricing the cost of carbon into investment decisions,” he says.

More focus on the green agenda could encourage a swing back to sourcing goods and services closer to home, argues Jonathan Russell, president of the UK200 group of accountancy firms. There are also supply chain considerations, he says. “If it takes six weeks to ship goods from the Far East and they arrive faulty, you have a major problem.”

So what’s the bottom line on 2008 for British business?
Sadly, it looks like tighter finances and more insolvencies. During the earlier part of this year, there’s been a healthy level of restructuring and refinancing activity. But, says Carolyn Swain, a corporate recovery partner at law firm Halliwells, “We would not expect this situation to continue. Lenders are reviewing their loan books and appear reluctant to lend more to some companies where they are unhappy about the gearing of loans.

“In 2008, there is likely to be an upwards trend in formal insolvencies as highly leveraged companies find that they are unable to refinance and their existing lenders are no longer prepared to support them further,” says Swain.
“Additional pressure in the form of increased pension protection fund levies for defined benefit scheme funds ­ where the bill will almost inevitably be passed on to the employer ­ will also create more difficulties for employer companies that may have been relying on refinancing to solve their problems.”