With the holiday season now well and truly over, the grim realities of the economic backdrop continues to dominate market newsflow. Economic growth prospects have deteriorated further and the magnitude of the recent fall in industrial output across Europe goes some way to outlining the scale of the downturn.

Weak US retail sales only compounded the negative sentiment and so ended the brief equity rally of the early part of the year.

The staffing sector has been no exception, largely giving up its early year gains, as Hays’ and Michael Page’s Q4 announcement’s highlighted that even geographic diversification has not provided a safe haven from the storm.

From a company perspective, the commentary remains downbeat, but in our view realistic. Following a further 524,000 jobs shed in the US non-farm payroll data for December, Manpower’s chairman and chief executive, Jeff Joerres, outlined that he expected continued job losses for at least the next two quarters. Adecco has provided a similar outlook for market conditions.

The industry’s response is following the typical cyclical trend. Cuts to consultant numbers are evident through both attrition and office closures, with the reluctance to lose a regional presence leading to rationalisation rather than withdrawal.

The structural demand trend for temping across Europe remains in place, and a full-scale withdrawal at this stage would be myopic. However, with investors focusing on companies with strong balance sheets, a focus on cost-cutting and cash flow remains the best strategy at this stage.

While we sense a modest improvement in investors’ risk appetite at the cyclical end of the sector, leading to a share price rally in late December, we remain concerned that it may run out of steam as we enter the company reporting season in February/March. One trend appears certain: staffing sector newsflow is likely to get worse, before it gets better.

• Steve Woolf, support services equity analyst at Singer Capital Markets