The immediate impact of COVID-19 on UK businesses
The COVID-19 pandemic has brought fast-changing and unexpected variables for British businesses in all sectors and of all sizes. Mike Collis, Head of Portfolio at Maven, looks at the abrupt economic impact the coronavirus has had and how the rapidly evolving landscape required a swift response from business owners.
In recent weeks we have started to see a gradual easing of the lockdown restrictions across all parts of the UK as infection rates continue to decline. Whist this direction of travel is welcomed, and the news is generally being received positively by the business community, there remains the risk of a second wave of infections, with localised coronavirus outbreaks occurring in Europe last week, for the first time in months, as countries started to lift aggressive lockdown restrictions and tentatively resume tourism. However, rapid and targeted interventions have been implemented by the authorities to control these outbreaks.
As the UK edges towards a situation which reflects some kind of normality and “our long national hibernation is coming to an end”, as UK Prime Minister recently told parliament, it is important to understand the widespread impact COVID-19 has had on the SME sector and how it will recover. After all, smaller businesses are the lifeblood of the British economy, accounting for 60% of total employment and around half of turnover in the UK private sector (according to figures produced by the Department for Business Innovation & Skills).
As a starting point it is worth taking stock of the macro economic impact of the virus. The latest forecasts provided by the Bank of England indicates that the UK economy will shrink by 14% in 2020. To put this enormous contraction into context, this will represent the largest annual reduction in economic activity since the War of Spanish Succession and the Great Frost in the early part of the 18th Century.
Preparing long term forecasts in such volatile and unstable circumstances is difficult but a recent analysis provided by Deloitte has adopted a base case which predicts that pre crisis levels of GDP will not be achieved until the first half 2022 at the earliest. The UK unemployment claimant rate has jumped from 4% to 6% since the start of the crisis, while over 30% of the UK’s workforce has been supported and sustained by the furlough scheme which is due to be tapered away in the second half of 2020. The Bank of England forecasts that household consumption will fall by 14% in 2020 while the household savings ratio will increase from 6% to 17%. Both factors will pose a significant drag on any anticipated consumer led spending recovery. Allied to the fact that public debt is expected to increase from 80 to 100% of annual GDP, and base rates are already resting at historical lows, it raises questions about what levers the UK government has at its disposal to stimulate a recovery in economic activity through traditional fiscal and monetary policies.
A survey conducted by Deloitte of UK CFOs shows that 52% of the companies surveyed plan to reduce output or close factories, and 76% of companies plan to reduce costs. Social attitudes have also changed over a short period, with households understandably being less comfortable about having domestic workers in their homes, going to bars/restaurants, using public transport and attending large public events. There is, however, some reason for optimism. The requirement to embrace new technologies to overcome social distancing regulations may lead to a positive change in working practices, with 99% of companies surveyed intending to introduce or expand alternative working arrangements and other forms of staff flexibility. Forecasters are also expecting a strong recovery to begin in the second half of 2020, which will inject a sense of optimism into the economy despite being launched from a very low base and likely taking a number of years to get back to where we were.
In our experience, many SMEs have managed the initial impact of the crisis well, considering the speed and severity at which it hit. At the onset of the pandemic, Maven asked each of its portfolio businesses to prepare an impact statement including detailed cash flow forecasts setting out the anticipated effect of shut-down. This helped to ensure that effective decisions were taken on a timely basis, and enabled Maven to share good ideas and best practices with our other portfolio businesses. This was particularly helpful in the area of health & safety and social distancing, to ensure that companies were able to continue to trade in a safe and compliant manner. In exceptional cases, the crisis led to an increase in demand, particularly for those businesses aligned to the medical products and services sector. Some other companies were able to adapt quickly and open-up new markets by utilising their established supply lines to source high quality PPE for the health sector and front-line workers. The adoption of digital conferencing technologies has also enabled Maven to work and communicate with its portfolio in a more effective manner, enabling regular and effective contact to be maintained with minimal cost and disruption.
Over the short term businesses have been able to cut costs with the support of the furlough scheme and cash generation has been facilitated by falling levels of working capital. Further support has come through the ability to defer VAT payments and the availability of government sponsored loan schemes. These measures have provided valuable breathing space to enable businesses to prepare and plan for the challenges that lie ahead as the economy swings back into recovery. As we look back on this crisis in future years, it may be the case that the short term impacts of the crisis were the easiest to manage and overcome. The bigger challenge may be managing the medium and long term effects of the pandemic.