Is recession in the US a foregone conclusion? If so, what effects will we see in the UK? Joanna Higgins gauges the responses of business leaders and garners their tips on weathering a slowdown

The UK markets have been buffeted by a "westerly gale" from across the Atlantic, in the words of the Bank of England's governor, Mervyn King, who told IoD members in late January: "Lenders intend to tighten conditions further this year. This tightening is unlikely to be short-lived."

A few weeks later, as he issued his quarterly inflation report in February, King went further and actually predicted a "decrease in the standard of living" for many UK consumers, with house prices heading down and inflation on the way up. It was his gloomiest assessment of the economy for some time.

And it's a view that's shared by most other economists. Graeme Leach, chief economist at the IoD, admits that the picture is uncertain at best. There is increasing support among IoD members for the notion of "stickyflation"—a dramatic slowdown in GDP growth, against a background of stubborn inflationary pressure. But the overall picture is mixed. "Our latest Business Opinion Survey (BOS) is tricky to interpret," says Leach. "Although there are signs of a tail-spin in confidence, companies still envisage some increase in investment this year."

Wherever you look, the signals are mixed. According to the BOS, 36 per cent of directors expect employment to increase in 2008. But the last Labour Market Outlook (LMO) from the Chartered Institute of Personnel and Development and KPMG suggests that employers are starting to feel the pinch, with 38 per cent intending to make some redundancies in coming months, up from 17 per cent in the autumn.

Ruth Lea, economic adviser to Arbuthnot Banking Group, claims that the US slowdown is bound to have an impact here. "The US is still the biggest economy in the world, accounting for 20 per cent of world GDP, so there will be knock-on effects for the UK, in particular for exports and throughout the financial markets. Oil prices and higher fuel costs are pressuring inflation."

And yet, it is still possible to find relative optimism in the UK. "You can never rule it out entirely, but provided unemployment doesn't increase, the housing market shouldn't go into recession," says Lea.

There is also concern about "second round effects" on consumer confidence, which can drive a downturn if unemployment does tick up. If consumers start to save instead of spend, it will impact on sectors as diverse as retail, leisure and manufacturing.

So how are directors responding to this challenge? And how do they see prospects for their businesses and the economy? To find out, we spoke to eight directors, from Sir Martin Sorrell at advertising and marketing giant WPP, to Adam Balon at Innocent Drinks. The overall impression is what a weatherman might describe as "cloudy, but fine". On the following pages our directors offer their predictions for the coming months and give tips for surviving a recession.

The ad man

Sir Martin Sorrell Group CEO, WPP
Sector Media and marketing

Will there be a recession?
"If you take recession to mean two consecutive quarters negative growth then it is quite unlikely that there will be a full-blown recession in the US this year. It depends on what the Fed does, but the US economy is definitely in for much slower growth. And I am singularly gloomy about western Europe, with the possible exception of Spain. I don't see any real changes in the UK's prospects, which is why WPP is focusing more on Asia, Latin America, the Middle East, eastern Europe and Africa. People forget that it's non-US markets that have shown global growth. I'm not convinced that we now live in a totally decoupled world, but it is less coupled than it used to be—so, if the US sneezes, we may still catch a cold but we won't get influenza.

"In terms of WPP, this is a strong year, with the Beijing Olympics the strongest games we've ever seen. They are the capstone of China's economic growth over the past 20 years. Any business serious about making its mark in the Chinese market will have to take advantage of the opportunities these Games present. Second, the US presidential elections are bringing in £3bn to the organisation and third—even though England is out—there are the European football championships. All three of these events are expected to add one to two per cent to worldwide growth.

"WPP is also focusing on digital technology—online, mobile, video and PCs-which is revolutionising consumer media habits. In the UK, it is already 23 per cent of the business, but we'd like it to account for one-third of our business globally.

"The bad news is that there's almost certainly going to be slower growth in 2009. There are no major events in the quadrennial cycle and a new US president will be looking to establish themselves and will take early measures that are likely to have an impact on consumer confidence. Likewise, there may be a post-Beijing Games reaction, which is to be expected. And China and India cannot sustain a 10 per cent growth rate. It's a natural part of the cycle, but I would be a bit more sanguine about prospects in 2009. If you think about it, we've had strong, steady growth since 1991 (with the exception of the dotcom boom and bust)."

Slowdown tips:
• Be as flexible as possible in terms of your costs.
• Variable incentives, performance-related pay and freelance and consultancy work allow room to cut back on costs in times of slower growth.
• Watch costs closely this year, especially headcount.
• Focus on growth markets globally and also on areas of new technology.

The manufacturer

Dawn Gibbons Chairman, Flowcrete
Sector Floor manufacturing

Will there be a recession?
"There may be a US recession, but it's awful to see such pessimism regarding UK manufacturing. The small and medium-sized manufacturing base in this country is doing really well. We just do flooring, but we do everything to do with flooring. Flowcrete's UK operations were targeting £550,000 profit before tax; it achieved £1.5m. Globally, the group profits were up, too. But wider economic volatility is less worrying than personal recessions, which have more to do with a failure to recognise something you've done wrong in the business."

Slowdown tips:
• Diversify products and geography.
• Go east.
• Keep innovation and marketing spend up.
• Put your "lean" team and your inspirational team together to determine new markets.
• Engender pride in the brand.
• Your people have got the answers: so, ask them.
• Get together with your teams regularly, socially as well as for planning.
• You may have to look at your headcount, but think about redeploying them to a new market.

The money man

Jon Moulton Managing partner, Alchemy Partners
Sector Private equity

Will there be a recession?
"The UK will probably avoid a recession, but I think a serious downturn is inevitable. When things turn down, everyone tends to be affected, although some will always fall a lot further than others. From Alchemy's point of view, we are looking forward to the year.

"We have the only European distressed debt fund, so that's looking cheerful at the moment. In private equity, deals will be fewer and more protracted, while sellers may be wary of coming forward while there is so much market volatility. But against that, their deals will be driven by fear more than the greed that has prevailed of late—and there is nothing more attractive than a deal driven by blind terror."

Slowdown tips:
• Investors need nerves, sensible funding structures and restructuring skills.
• Directors need to gird up for unexpected bad news, and also need to not panic.
• React as constructively as possible, even if that may be a case of calmly calling for the undertaker.
• Learn the legal and accounting ramifications of corporate insolvency and doing business in a downturn.
• You need robust managers who won't panic.

The financier

Julie Meyer CEO, Ariadne Capital
Sector Seed investment

Will there be a recession?
When things change, there could be certain financing sources that draw back a bit. But there are still ways of getting things funded and market corrections create deal opportunities. Everyone wants to predict the death of the US as a reserve currency. But we're interlinked; it's less about who's in the driver's seat and more about the level of co-operation and collaboration that needs to happen.

"I've always been counter-cyclical. We set up in December 2000, so downturn doesn't faze me because if we could survive 2001 and 2002, nothing's going to sink this ship. When people get nervous, we want to be more aggressive. The model of Ariadne is simple: the people who've established their credentials as entrepreneurs back the next group. We're also being approached by corporates looking for strategic advice in interpreting changes that may affect their markets, especially in new media."

Slowdown tips
• It helps to have an agile model: a company built in a downturn is forced to be a Fiat Punto, not a Mercedes S-Class. It establishes early financial discipline.
• You can learn a lot about scale and efficiency by being online.
• Business models are being reworked to work for every party in the food chain—the eco-system model.
• Bring in somebody who's not going to see the same sacred cows.
• If you were to set up your business today, what would it look like? Can you move from here to there, or is it too far?
• Diversity of people is a tremendous asset. If you're all one culture, you have to ask: where's our blind spot?

The smoothie maker

Adam Balon Co-founder, Innocent Drinks
Sector Food & drink

Will there be a recession?
"I'm fairly convinced there will be a slowdown and it may even be quite severe for a short period. But the US is a resilient economy, so I'm sure it will bounce back.

"Innocent is in what is termed 'defensive stocks', which tend to be less hard hit than some other sectors. People may cut back on fancy holidays abroad, but they are still willing to spend a small amount on smoothies. We will continue to invest in branding and product quality.

"As a private business, we are free to make longer-term investments without being answerable to the City. We are focusing on Europe and the UK, but I'm not sure if we'd have changed strategy had it involved going into the US."

Slowdown tips
• Don't panic.
• Don't build bullish plans for the immediate future.
• But don't slice investments in the business that will serve it well [once things pick up again].
• Don't be too quick to throw out a strategy for expansion or growth, although you may want to take a look and adapt it.

The entrepreneur

Alex Connock CEO, Ten Alps
Sector Media

Will there be a recession?
"I have two degrees in economics and I still don't understand the economy. But people running businesses shouldn't be expected to know the future. That's why the stockmarket and finance industry exist.

"At Ten Alps we have diversity by product and by client. We have trade titles, TV programmes and a conference division. We bought up contract publishing houses that were perceived to be a dying world. And we've been vindicated. You probably don't get the highs of an economic boom cycle, but you don't get the lows, either. I've never seen any sign of our business being related to the economic cycle, anyway, because we're too small."

Slowdown tips:
• Diversify. There's always a [profitable] client that can come out of left-field.
• Consider buying in a recession.
• Present a clear and strong plan to institutional fund managers.
• Ask yourself, how can we re-tool for a new reality?
• Have repeatable brands that make money while you're asleep.
• That Napoleon quote about 'bring me lucky generals' is so true.
• History just rolls on. All you have to do is survive.
• It doesn't matter how many times you fail, you only have to succeed the once. It's an annoying aphorism, but it's also true.

The online entrepreneur

Richard Mason Joint managing director, Moneysupermarket.com
Sector Online price comparison

Will there be a recession?
"The UK may be helped by the vast number of economically active immigrants, which may buoy up the lower end of the property market. Manufacturing may be vulnerable, but manufacturing's loss is less important than losing IP and our ability to innovate.

From our sector's viewpoint, it takes a lot to encourage UK consumers to change suppliers. When there is concern about rates, it drives people to seek information from price comparison sites."

Slowdown tips:
• Move your business online.
• High street darlings are falling out of favour; online sales are phenomenal.
• The internet's becoming a global marketplace for white goods and electrics.
• Every business needs to look at how they can maximise their online activity.

The property tycoon

Nigel Rich Chairman, Segro (Slough Estates group)
Sector Industrial property

Will there be a recession?
"For growing businesses, the banks may be reluctant lenders, which could make stagnation self-fulfilling after a while. But US banks have moved to address problems and let's not forget that the US economy is enormously resilient. China may be slowed, but it won't stop.

"We took steps last year to sell US real estate interests. I'd dearly like to say it was in anticipation of the credit crisis, but it was a strategic decision to increase Segro's asset exposure in Europe. The timing was immaculate, though. The impact of a slowdown would be from business tenants either not expanding, contracting, or going under. We have good covenants and I don't see an immediate effect on industrial property. But if stagnation were prolonged, everyone would feel the effects."

Slowdown tips:
• Reassure employees. They will be reading the headlines and may be concerned.
• For directors, this may not be the best time to take a huge risk.
• Retain a strong balance sheet and ensure you have available cash, both as a signal of strength and for the post-recession opportunities.
• Some sectors will have to batten down the hatches.
• After a prolonged period of growth comes market change. Being prepared means not over-gearing the balance sheet; taking measures for the longer term; and, in property, not embarking on developments without tenant commitment.
• It also helps to have the cash in the right bank.

The leadership solution

"The traditional ways of avoiding recession are not working. In the past we've outsourced to cut back on costs, but you can't do it again," says Tom Barry, European managing director of HR consultancy Blessing White. "It's a natural part of the cycle of capital movements, but directors need to actively manage its effects."

The difficulty, adds Simon Mitchell, director of leadership consultancy DDI, is that not many companies analyse leadership skills in good times. "We've had 10 years of growth, so many may not know where to find experience of cost-cutting, let alone motivating people," he says. So what are the leadership skills for a downturn?

1. Spot your weaknesses
Says Mitchell: "Look at the skills you need and make sure managers develop them now, through assignments or coaching."

Innovation and resourcefulness might also be lacking. If so, set up programmes internally to help those who show some ability.

2. Set a direction
Says Barry: "In crisis, a leader's connection matters: their ability to empathise with employees, as well as set clarity and direction. It's about helping people do more of what they do well. Engage staff, keep them enthused and ready to deliver that discretionary effort. In a slowdown, that's essential. Focus on making people as productive as possible and keep them informed. Meet regularly to discuss the reality of the market and what it means."

3. Keep your key people
Think about top performers. They are the most mobile and likely to go, and the impact on a small business will be significant. "Those you have confidence in need to be retained," says Mitchell. "It's short-sighted to cut development if you risk losing people, especially if a downturn ends quickly."

4. Delegate
You'll need to be more agile to respond to market changes, which means giving people permission to change a strategy that has already been set, notes Mitchell.

5. Be realistic
There might be areas of employment that, once a torch is shined on them, could be lost. Says Barry: "The better companies will be taking a good look at things that were once considered sacrosanct."

The model student

Your level of exposure in a crisis will depend on a range of things, only some of which are under your influence. Adapting your business model to a change of prospects is one. "You have to go back to basics, ensuring you are diversified, in terms of business segments and geography. Don't go into panic mode," advises Pierre Pourquery, managing director and partner in Boston Consulting Group's London office. Below, he offers a five-step guide to adapting your model:

1. Reinforce your organisation's controls
Pay special attention to anything relating to fraud and accounting. People become nervous and this can lead to people losing focus and let the controls that safeguard the business slip.

2. Try to understand your level of exposure
Work out current levels and make projections for the future by putting together different scenarios.

3. Be pro-active, not reactive
People tend to wait for a crisis, then react irrationally, making rushed decisions. Be aware, too, that the market is watching you and will be anticipating your next move. Someone will see you're going to sell assets and will push down their value. So you need to understand your market and get ahead of others' expectations.

4. Develop hedging mitigation strategies
There will be opportunities that arise towards the end of the crisis. You may not be able to act during the crisis, but develop strategies and capabilities around them so that you're ready to act quickly as things pick up.

5. At the end of a crisis, start addressing your weaknesses
You will uncover flaws as part of the self-assessment you did at the beginning. Mid-crisis is no time to tackle these, but as you emerge, you must take the necessary time to de-bug any weaknesses in your organisation, people or the way your business works.