Recession to hit Europe this year and US next year, says Sorrell

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WPP, the world's largest advertising group, has issued a stark warning to businesses across Western Europe, revealing that the crisis in the financial sector has already spilled over into the wider economy, with the most serious effects being felt since the beginning of March.

WPP said yesterday that despite the widely held view that the US has already moved into recession, it was actually suffering much more seriously in Europe, where sales in the first quarter increased by just 3 per cent compared with the same period a year ago, damaged by a particularly lean March.

Sir Martin Sorrell, the chief executive of WPP, said that while the stability of WPP's US earnings appeared puzzling, it reflected the different approach on opposite sides of the Atlantic taken towards the threat of an economic slowdown.

Whereas US manufacturers are able to pass on their rising costs to consumers, thanks to a series of Federal Reserve interest rate cuts that have boosted household budgets, Sir Martin said the "pretty awful" situation in parts of Europe reflected the reluctance of central banks to cut borrowing costs aggressively. The European Central Bank has been particularly reluctant to reduce interest rates in the face of a sharp rise in inflation.

"It is a combination of rising prices in the US and the difference in economic policies," Sir Martin said. "Because of that difference, it is logical that Europe would be affected first – next year will be the more difficult year in terms of a slowdown in the US."

The views of Sir Martin and WPP are widely followed because the scale of the advertising group exposes it to a wide range of different businesses around the world. Sir Martin said yesterday that his European clients felt the effects of the credit crunch on the wider economy had really begun to bite in March. "If you go to the TV companies, particularly in France, Spain and Germany, they are seeing pretty awful months," he said.

So far, WPP's UK business has escaped the worst of the gloom on the Continent, but only bec-ause it is starting from a lower base. Year-on-year, WPP's sales rose 2 per cent during the first quarter of 2008 in the advertising company's worst performing market, but this was in line with growth rates over the past three years. "The bad news about the UK is that it is low growth" Sir Martin said. "But the good news is also that it is low growth, so nobody's got any great expectations."

Nevertheless, other UK advertising groups said yesterday that their prospects were increasingly dire, with some groups slashing forecasts for growth in 2008 to close to zero. Alan James, the chief executive of the Outside Advertising Association, said: "For the last three years, growth has been at between 4 and 7 per cent, but this year we are expecting 1 or 2 per cent – and that is with a fair wind."

Advertising agencies are also feeling the pinch. The quarterly bellwether report from the Institute of Practitioners in Advertising (IPA) this month revealed that one in five companies was revising marketing spends downwards, the sharpest fall in eight years. Moray MacLennan, the president of the IPA, said: "Agencies in London and Western Europe are beginning to feel the effects of marketing budgets going down,for the first time in two or three years... in the last month or so in particular the economic climate has begun to have a direct effect."

The gloomy predictions follow similar alerts in other areas of the economy. Royal Bank of Scotland said last week that March's worsening financial climate was one factor in its decision to launch a £12bn rights issue.