Business Viability Depends as Much on the Health Response as the Economic One

Covid-19

Business Viability Depends as Much on the Health Response as the Economic One

Commentary
Posted on: 31st July 2020
Jeegar Kakkad
Head of Productivity and Innovation

New figures released yesterday underscore the anaemic pace of the UK’s recovery from lockdown. Facing impossible trading conditions, businesses need government to resolve the confused messaging about masks, returning to the office and the travel quarantine to prevent the economic outlook going from bad to worse.

In the fortnight before the first easing of lockdown measures on 15th June, 86% of businesses were still trading, and of those firms, 64% had seen turnover fall by more than normal levels, including 22% that saw turnover fall by more than 50%.

Since then the picture has improved, but only slightly. Yesterday’s survey data from the ONS is for 13th-26th July, the first survey period to fall entirely after the 4th of July easing measures. In the latest survey, 93% of business reported they were open for trading, with only 7% deciding to keep their business closed. Despite most businesses trading again, 57% of firms saw turnover fall by more than normal levels, including 36% that reported turnover falling by 20% or more.

The latest Bank of England’s Decision Maker Panel survey shows this outlook is set to persist through the winter, with firms saying sales, employment and investment are likely to remain lower than they otherwise would have been at least until the first quarter of next year (see Figure 1, below).

Table 1: Business impact of the coronavirus

 

1st-14th June

13th-26th July

Businesses continuing trading (%)

86%

93%

Turnover has decreased (total, %)

Turnover decreased by up to 20%

Turnover decreased by 20% to 50%

Turnover decreased by over 50%

64%

20%

22%

22%

57%

21%

22%

15%

Firms with cash reserves less than 6 months (%)

44%

41%

Source: ONS

 

 

       

And according to the ONS, 45% of companies said they had cash reserves to last between zero and 6 months, while only one-third of businesses are confident they have 6+ months of cash reserves. This sustained pressure on business means many firms may not be able to keep trading or maintain employment and investment when faced with lower sales and fixed costs such as quarterly rent payments and debt repayments.

Figure 1: Expected impact of Covid-19 on sales, employment and investment relative to what otherwise would have happened, average percentage impacts

Source: Bank of England Decision Maker Panel

Constraints on business viability

 How quickly are things likely to improve in the months ahead? The answer will depend on a mix of factors, and four are particularly important:

 (i) Social distancing rules

ONS data suggests that 22.5% of employees work at arms’ length or closer to other people, with a further 42.6% of employees working slightly close (ie in a shared office) to others. A survey by the Institute of Directors suggested that social distancing rules could mean that 22% of their members would only be able to operate at less than 50% capacity.

Social distancing rules will also impact employees’ ability to return to work, in particular town and city centres. The rail industry believes that social distancing of any kind would reduce capacity by over 70%, while the new 1-metre distancing rule would leave capacity on the London Underground at just 25% of pre-crisis rush hour levels. Until a vaccine is found, Government will need clearer, more consistent crisis comms and containment infrastructure (including mass testing) to give people confidence to return from remote working in cities and towns. 

(ii) Unsustainable debt levels

As of 28 July, the government had approved over 1.1 million loans worth over £48bn to help UK businesses survive the lockdown and to support their eventual recovery. Yet by March 2021, the City UK estimates that there could be approximately £100bn of unsustainable debt held by UK businesses, of which around £35 billion would stem from Government loan schemes.

In total, City UK estimates that roughly one-third of the companies with government-backed coronavirus loans could struggle to repay their debts by Q1 2021, putting these businesses at risk of failing and their roughly 3 million employees out of a job. Getting the health response right would mean more companies getting closer to normal trading levels and make their debt more sustainable.

(iii) The recovery in international trade

According to the latest World Bank Covid Trade Watch Bulletin, global trade in goods fell by about 19% in April year-on-year (with steep declines of 50% for capital goods) while trade in services fell by 16% in March, with data from China, Germany, Japan and the US indicating the decline deepened in April.

By late May and early June however, there were only modest signs of a rebound. Container ship capacity – a leading indicator for a rebound in shipping and manufacturing demand – began to recover in Asia and Oceania, but continued to decline on European and Mediterranean routes, and on both North America Coasts.

The most recent data for air cargo and international aviation shows a similar pattern, suggesting that demand for manufacturing products and business services in the UK will take time to recover.

 (iv) Cautious consumer sentiment

 Despite the government’s encouragement, consumers in the UK remain relatively cautious about returning to pre-crisis spending patterns. According to McKinsey, UK consumers reported a decline in spending between May and June. This is in part because 55% of UK consumers expected their personal or household finances to be adversely affected for four or more months, compared to just 43% in Germany.

Google’s Community Mobility Reports up to 25th July also confirm that UK consumers’ and workers’ behaviours remain further behind their pre-lockdown baseline than in Germany, France and the US (see Table 2). The Citymapper Mobility Index for the week ending 26th July shows that activity in London remains at 36% of its pre-lockdown average, compared to 51% in Berlin and 65% in Paris.

Table 2. UK mobility trends remain below pre-crisis average, other countries

 

Retail & Recreation

Public transport

Workplaces

UK

-40%

-37%

-15%

France

-19%

-1%

-6%

Germany

-17%

-8%

-1%

US

-19%

-21%

-13%

Source: Google Community mobility reports through 25 July

Learning to live with the virus

While the government can’t solve all the problems above, it’s support for the recovery is weak and it has yet to put in place a clear and comprehensive containment architecture to manage local outbreaks or even a second wave.

As we get more data about how businesses fared after the lockdown, it’s clear that Government’s response to the pandemic – and the public’s confidence in that approach – will matter to businesses’ viability in the coming months.

For example, the recent confusing and inconsistent approach to travel quarantines and testing has grounded the nascent recovery in the aviation and tourism industries. And despite government urging workers to return to offices from 1st August, 38.7% of employees are still working from home, and only a small minority of those are expected to return from remote working in the next two weeks.

While concerns about business viability raise serious questions about how best to unwind the furlough scheme and manage unsustainable debt, yesterday’s data suggest that businesses' ability to live alongside Covid-19 depends just as much on the health response as it does the economic one.

Find out more
institute.global