It’s fair to say a lot has happened since our last monthly update, which noted business and consumer optimism was on the up. The rapid spread of coronavirus in the UK has upended our daily lives and the economy.
The impact on the economy is occurring in different ways: from enforced closures of businesses to supply chain disruption and uncertainty over how long it will all last. It is clear the economy has entered recession.
Official statistics reflecting the current situation won’t be published until late April at the earliest. However, a range of other sources such as business surveys and anecdotal information can be used to capture some of the economic disruption. Here we summarise the available evidence.
This is a fast-moving situation and the content here should be read as correct at the date of publication (02.04.20).
Economic shock took hold in March
Over the course of March, public health measures designed to slow the spread of Covid-19 became more stringent as the scale of the crisis became evident.
On 20 March, the closure of restaurants and pubs was announced. On 23 March the Prime Minister announced a ‘lockdown,’ with non-essential shops closing and a stricter social distancing policy.
Even before shops were shut, advice to limit foreign travel and then for the general public to stay at home was having an impact on the economy. A proxy for the number of journeys made in London and Manchester, provided by the Citymapper app, shows a noticeable decline from the middle of March (see chart below). Retail footfall shows a similar pattern, according to data from Springboard, a retail research provider.
The extent of the economic impact of all this is difficult to gauge. But with fewer people able to work, companies in some sectors being shut down entirely, and people largely stuck at home, there is clearly a serious impact on many businesses.
Measures to support businesses and workers
Some companies face big declines in revenues, while still having fixed costs such as rents and wages to pay. Consumer-facing services sectors, such as hospitality and entertainment are thought to be most vulnerable. Even firms with good long-term prospects, who make profits in normal times, can face cash flow issues in the meantime.
Some may have cash reserves to make the required payments or be able to borrow. Some may not and face the prospect of going out of business. This may lead to them cutting wages or laying off staff. It is likely unemployment levels will rise.
A survey conducted 25-27 March by the British Chambers of Commerce reported that 18% of businesses had less than a month’s worth of cash in reserve. A further 44% had 1-3 months’ worth. Meanwhile, 44% of businesses surveyed said they expect to furlough at least half of their workforce in the next week.
Policies intended to help businesses and workers have been announced by the Government and the Bank of England. The first package of measures was announced on the day of the Budget, 11 March. Since then, more extensive interventions have been made. These are set out in our briefings on support for businesses and the effects of coronavirus on the economy.
The key goal of these policies is to offer companies in difficulty a financial bridge over the current cash shortfall. If businesses can be kept afloat, they either will not have to reduce their workforce by as much or be in a better position to get going again following the crisis.
Financially supporting workers who face unemployment, or the loss of income due to fewer working hours, may also help to reduce the impact of lower consumer spending on the economy.
Economic data shows steep decline in activity
How effective these policy measures will be in practice remains to be seen. Even if they are effective, they will not be able to completely mitigate the economic downturn that is currently underway.
While official data won’t be available until late April at the earliest, other indicators provide a guide to what is happening in the economy.
Business activity fell sharply in March according to the closely-followed IHS Markit purchasing managers’ index (PMI). The services sector had its steepest fall since the series began in 1996.
Some businesses are in trouble
Other surveys reflected the concerns of many businesses who fear they may go out of business. For example, a survey of ‘business leaders’ conducted 20-26 March by the Institute of Directors, found 39% thought coronavirus posed a severe threat to their organisation. 40% had contacted their bank about an emergency loan.
An Opinium survey commissioned by Be the Business, an organisation that supports businesses raise productivity, reported that 7% of small businesses had stopped trading permanently. A further 12% said they would likely close within a month. 8% have made redundancies, with 15% planning to in the next month. The survey was conducted 20-24 March.
Similar figures suggesting 18% of small- and medium-sized firms may not survive until the end of April were reported by the Corporate Finance Network of accountants.
Unemployment already appears to be increasing sharply based on new benefit claims figures. The Department for Work and Pensions reported there were almost 950,000 new claims (applications) for Universal Credit in the two weeks to 31 March.
This compares with an average of 110,000 per fortnight over the course of 2019.
The Bank of England’s network of agents, who are in contact with businesses across the UK, reported sharp falls in consumer demand in the first few weeks of March.
The travel, leisure and hospitality sectors were particularly badly hit. Car sales were also down significantly. Some businesses had put investment projects on hold to preserve cash. The Bank summarised economic conditions in bleak terms:
“The Covid-19 (Coronavirus) pandemic has caused a sudden, rapid decline in economic activity in recent weeks. The situation has been described by many agency contacts as being worse than the financial crisis in 2008.”
While we don’t know how deep the recession will be, it is clear we are already in recession. The crucial question is how long it will go on for.
This will be determined by how long the lockdown is in place for, and how much permanent damage is done to the economy in the meantime.
Coronavirus: Latest economic data, House of Commons Library, 31 March 2020
Coronavirus: Effect on the economy and public finances, House of Commons Library, 27 March 2020
About the author: Daniel Harari is a researcher specialising in UK and international economies.