Advertising: Is it a blip, or are we heading for recession?

Newspaper ad sales were starting to look up, but Vincent Graff finds clouds are blowing in from the High Street

"We are all paid to be optimistic," sighed one newspaper advertising sales manager, "but I hate it when advertisers with big chunks of budget simply disappear. It's bound to hurt somebody somewhere."

"We are all paid to be optimistic," sighed one newspaper advertising sales manager, "but I hate it when advertisers with big chunks of budget simply disappear. It's bound to hurt somebody somewhere."

The executive is worried. So are his counterparts across the newspaper business. Earlier this year, it looked as if the industry was finally crawling out of recession. Advertising sales were climbing modestly and had been for a while: after three years of savage falls, total spending on advertising in national newspapers, for example, was up 3.9 per cent in 2004 on the year before.

True, the sky - which had fallen in after the dot-com bubble burst five years ago - was not yet the deepest blue, but modest sunshine was forecast. And then, two months ago, the clouds suddenly reappeared. Bottom lines which had been showing growth suddenly began going in the opposite direction.

Last week, DMGT, owner of the Daily Mail, Mail on Sunday and 100 regional newspapers, admitted that "the group's UK newspaper businesses face uncertain advertising markets".

DMGT is luckier than most: its advertising was 1 per cent up in April on the year before. But its rival Trinity Mirror announced that advertising had declined 1.4 per cent in March and April, compared with last year.

In other media companies the numbers are far more worrying. GCap, the newly merged radio company that owns Capital and Classic FM, recently reported advertising revenues down by 27 per cent. There was also a double-digit decline at Chrysalis, owner of Heart and LBC.

Newspapers fear that they could end up in similar difficulties. And it is the retail sector, which spent 8 per cent more in national newspapers in 2004 than in 2003, which is giving them the creeps.

Last week, Marks & Spencer announced that its profits had slumped by a fifth, and sales were down 5 per cent. These numbers followed bad news from many of their counterparts - profits down 11 per cent at Boots; down from £610m to £15m at Sainsbury; poor sales at Next and Dixons. According to the British Retail Consortium, sales dropped 4.7 per cent in April 2005 compared with April 2004.

If the public are not going shopping, the stores tighten their own belts. "The first thing they cut is discretionary spending," said Maureen Duffy, chief executive of the Newspaper Marketing Agency. "Many of them still see marketing as discretionary spending - rather than as the investment they need to drive performance."

The big question is whether the fall in ad spending is a blip or a sign that the industry is heading back to full recession.

Several advertising sales managers last week all said the same. None of them wants to fuel negative expectations - but none can rule out a recession.

One of the more optimistic said: "We came through a very difficult time [after 2000] into a marketplace last year which was very good. But over the last month it has been a lot more difficult than we expected."

Another explained: "The trouble seemed to come around April. The popular newspapers did rather brilliantly last year, certainly in comparison with a poor year before, largely fuelled by retail advertising. But that money is not there any more. It is causing suffering."

So what has caused the problems? Several factors are identified: first, the general election. During the three weeks of any election campaign, one of the biggest buyers of newspaper ad space, the Central Office of Information (COI), the Government's advertising arm, withdraws from the market. This is to avoid allegations that the Government might be using taxpayers' money to swing votes. (Perish the thought that the COI should be used to buy political support at any other time.) At the same time, the theory goes, other advertisers feel uncertain at the prospect of a new government and also hold back spending.

This should be a temporary glitch. But the tap, turned off in April, does not appear to have been turned back on. And no one knows why. Interest rate rises or tax increases? House price fears? Or have we collectively spent too much on our credit cards?

More worrying still, some big spenders have left the market entirely. Remember those ads for a sofa firm in which Bruce Forsyth dressed up as a judge and promised to "see you all in Courts?" No longer. Courts went bust at the end of last year. Nor will you be seeing adverts for Rover cars, Allders department store or Coldseal windows.

"Just Rover alone, you could be talking £30m or £40m that has gone forever," said one newspaper executive. Other spenders are regrouping: "Financial advertising, which tends to be direct response, is not getting results at the moment," admitted one industry voice. "And recruitment advertising is awful."

For all this gloom, no one is panicking - yet. Steve Goodman, group press director at advertising buyer Mediacom, said that the past few months' jitters can be put down to an unfortunate coincidence of factors. "But now that the election is out of the way, we can perhaps head into a new era and hopefully things will pick up."

Paul Richards, media analyst at Numis Securities added: "I wouldn't see us heading into another major recession like we had in the early 80s, early 90s or 2000. I think all we will see is a moderation of growth this year."

And a blip that arrives without warning can disappear equally swiftly, claim the optimists. Indeed, one newspaper advertising executive said his pre-booked sales for next month are better than they were last year.

Sir Martin Sorrell, chief executive of the advertising giant WPP, famously likened the shape of the advertising recession to a bath - after the big drop came a long period of scraping along the bottom.

After staying in the tub for rather too long, the newspaper industry thought it was time to climb out and start to towel itself off. It may find itself soaking for a little longer.