Beyond COVID-19: What will be the lasting impact on the UK economy?
Business leaders have been reacting to the challenges presented by COVID-19, implementing initial measures and developing medium term plans in recognition of the uncertain economic landscape that will remain throughout this calendar year. Karen de Meza, Portfolio Director at Maven, looks at what the outlook might be for the economy beyond 2020.
Whether it be as employees, business leaders or investors, we have all had to embrace and adapt to a significant change in our working environment over the past four months. People are continually referring to the “new normal” and what implications that will have. How effectively your business responds will probably depend on your ability to cope with change, both financially and operationally, and the markets in which you trade.
At a macro-economic level, governments across the globe have faced unprecedented challenges. For the first time in more than five decades, UK public sector debt at the end of May 2020 had risen to nearly £2 trillion, which represents more than 100% of the UK’s GDP. The debt has arisen as a consequence of the substantial financial support measures offered by central government to individuals businesses and public sector bodies; the dramatic contraction in economic business activity caused by “lockdown” restrictions imposed on the UK population; a 46% reduction in VAT collections by HMRC, due to deferrals of payments to 2021; and the halting of trade in non-essential retail and hospitality sectors.
Whilst the rebalancing of the economic output to debt ratio is primarily a challenge for policymakers, and the debt burden will eventually be reduced, the UK will have to deal with the consequences of changes in fiscal policy. As a result, we are likely to see certain sectors grow in strength as a result of changes we’ve seen during lockdown, but it is also possible that others will diminish.
Similar challenges were faced following the first and second world wars, but we arguably face this crisis with more economic uncertainty. Whilst lockdown has caused a reduction in infections, the protagonist this time has not yet been conquered, at least not until an effective vaccine or treatment regime has been identified.
In recent months “Business Agility” has been the key phrase across the Maven portfolio. We’ve spent a lot of time working with management teams reviewing operating models, with a focus on long term viability, looking at financial forecasts, as well as identifying ways to maximise cash availability to bolster resilience of the business to the impact of an economic downturn. Many of the Maven portfolio companies have also been reviewing the flexibility of their workforce to operate and be managed virtually, particularly in the service sector, which will create the possibility for savings in office costs.
Our experience suggests that the current events will likely have lasting effects on how we work, rest and play, with traditional operating models, as well as modes of thinking and behaviour, being challenged by both organisations and workers. Real estate investment is perhaps a prime example. Social distancing and the need for contactless interaction has magnified the necessity for digitally enabled business models, improving the tenant experience and with a greater emphasis on health and safety. Developers are having to embrace the ‘new normal’ as part of their planning, ensuring that the process for any future development considers a range of COVID related enhancements, such as contactless entry, filtered ventilation systems, extra remote working space and seamless digital communications.
Now, more than ever, business agility and collaboration is vital. The ability to respond and adapt to change faster, while becoming leaner and more efficient where required, is crucial for business growth.
Online shopping has played a critical role in sustaining our economy and allowing society to function during the pandemic. It seems likely that it will permanently change consumer habits, or at least hasten the trend towards adopting digital technologies, and provide a prolonged boost to the e-commerce sector. We are already witnessing retailers closing physical stores and expanding or reinforcing their delivery services; and restaurants quickly converting to offer a takeaway option in order to remain operational and in touch with their customers. Fitness clubs are offering online classes, while universities and other educational establishments have been offering classes and support remotely. Amazon has demonstrated new ways to integrate procurement and logistics with delivery of on-line retail. By listening and adapting to customer feedback its strategy has been successful, and it is looking to hire new employees for its warehouse and delivery operations to keep up with demand. Perhaps the power of Amazon and the impact of COVID will see an irreversible shift in the modus operandi of the retail sector.
Global supply chain is another key consideration for many businesses. During the current crisis we have seen that the UK healthcare and business sectors struggled to source sufficient PPE products at pace, as supply chains have been over-stretched and interdependent. This creates a challenge for businesses and the possible need to balance short term profit maximisation with the management of longer-term risk. Countries may have to look closer to home to ensure there is quick, reliable access to quality products. This may require a mindset change for both government and business, and an innovative approach to overcome the potential increase in procurement costs. If that is achieved, we may well see a resurgence in the UK manufacturing sector which will form part of a broader agenda of economic planning post COVID.
Whilst some industries have been hit hard due to the coronavirus, the pandemic has given technology and software businesses the opportunity to excel and gain valuable customer exposure. A wide range of digital platforms and services have been essential over the past few months, significantly easing the burden of lockdown for individuals and businesses by providing high levels of connectivity, reliability and flexibility. If nothing else, this period has proven how deeply embedded technology is in our lives, and businesses will look increasingly to new technologies such as the cloud, 5G, IoT, and blockchain can help to improve their efficiency and robustness.