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The gloomy economic outlook has seen law firms downgrade their growth predictions, but a clear majority believe that the profession will keep expanding through tough times. Jeremy Hodges reports

Despite a stream of negative headlines and gloomy predictions that the UK is entering into a recession, two-thirds of senior City partners are still forecasting revenues to increase over the next 12 months.

Legal Week’s quarterly business confidence poll shows that while confidence levels have fallen for the third quarter in a row, many of those surveyed still expect commercial law firms to keep growing through the downturn.

Just under 54% of respondents to the Big Question survey said they expected billings at their firm to increase by up to 10% over the next 12 months, while a further 11% were bullishly predicting growth of more than 10%.

The results were similar when respondents were asked for their thoughts for the top 50 as a whole.

Just under 57% of respondents were expecting revenues across the group to grow by up to 10%, while a further 2% predicted turnover would grow by between 10% or more.

Michael Hatchard (pictured), head of English law at Skadden Arps Slate Meagher & Flom, told Legal Week: “The next quarter is looking reasonably promising with a strong pipeline of cross-border M&A dominated by strategic investors. If there is a slowdown, it is selective.”

Milbank Tweed Hadley & McCloy managing partner in London Phillip Fletcher said: “The markets are once again in a period of change, but we have seen before that times like these can present opportunities for a well-positioned law firm.”

Nigel Read, M&A partner at Lovells, said: “There is no doubt that the wider economy is being affected by the credit crunch, but we still feel reasonably positive. I do not think we will have a clear view of how the downturn will affect the legal market until the end of September.”

However, despite the optimism of some of those questioned, the survey results clearly show a drop in confidence levels.

As such the level of the respondents predicting double-digit revenue growth has plunged from the boom market of last year when more than 60% of polled partners were regularly predicting 10%-plus expansion

And while a clear majority of partners are still predicting growth, 24% of respondents forecast that revenues would be static over the next 12 months and a gloomier 11% predicted that billings at their firm would drop by up to 5%.

Herbert Smith corporate head Michael Walter commented: “We have had a fantastic first quarter, but I find it impossible to predict what the next will bring. Although our pipeline is looking strong, it doesn’t suggest we are headed for a bumper summer.”

Mark Vickers, Ashurst’s European head of loan markets, said: “There is no doubt that the economic outlook is going to remain very difficult; the challenging conditions for European M&A, leverage finance and real estate finance will persist well into next year, if not beyond.”

Michael Frawley, managing partner at Taylor Wessing, said: “The initial indications are that the first and second quarters will be down on this time last year and it is difficult to see how the market will improve by the end of the year.

“The indications are that this will be similar to 1992, which suggests there will be a significant downturn in real estate and finance instructions, and it remains to be seen if there will be a corresponding increase in litigation and insolvency instructions.”

Given the downturn in Europe and the US, most of the partners questioned are, unsurprisingly, expecting to see the most growth come from the key emerging markets over the next 12 months.

Just under 30% highlighted the Middle East as the top region for growth, closely followed by Asia (26%) and the Central and Eastern Europe and CIS regions with 21%.

However just over 17% still remain confident that the UK market will grow over the next year.

Herbert Smith’s Walter added: “While nowhere in the world is immune to the credit crunch, our international practices are providing an increasingly significant contribution to our revenue and profitability.”

The survey also questioned partners about the top investment priorities in terms of practice areas.

The overwhelming majority (36%) picked corporate, followed by litigation (29%) and restructuring (8%).

Freshfields Bruckhaus Deringer’s London head, Tim Jones, said: “I hope we are near the low point in terms of business confidence because it seems pretty low at the moment.

“But we would be brave to detect signs of revival just yet. However, it is not a completely stagnant market – that is why it is so important to be flexible.”

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