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Positive action is needed now

News | July 1, 2021

Positive action is needed now

As our economic research and analysis shows, the UK economy has suffered an enormous shock since March 2020. While the figures speak for themselves, they cannot convey the cold, hard reality of life as a business owner over the past 18 months. While some businesses have been able to innovate and find a way through these difficult times, others have found themselves eating away at cash reserves just to keep their heads above water.

As we emerge from 15 months of restrictions which have seen huge swathes of business communities closed entirely, or operating with restricted capacity and depleted demand, positive action is needed to enable businesses of all sectors, shapes and sizes to accelerate their recovery and return the UK to growth and prosperity.

Recovery from the pandemic is not the only challenge that businesses face: skills shortages, rising costs and the climate challenge were all issues top of the mind for business before the crisis hit. In rebuilding our economy, we must take the opportunity to not only recover from the damage caused by the pandemic, but to also begin to tackle these long-standing issues which have remained unresolved for too long.

Latest economic analysis

Despite recent improvements, official data confirms that UK economic output remains well below the pre-pandemic levels. Businesses have been through an incredibly difficult period, particularly in sectors such as leisure and hospitality, which have been, essentially, closed by law. In general, within each sector, smaller businesses have fared worse than larger ones (as with Brexit).

However, we are starting to see the return of some business confidence, linked to the vaccine rollout and the reopening of the economy. Assuming there is no resurgence of the virus that forces governments to impose further restrictions on businesses and communities, the first quarter decline in UK economic output should be followed by a robust rebound in economic activity in the second quarter, as the effects of the release of pent-up demand as restrictions ease and the strong vaccine rollout are felt.

While the short-term outlook for the UK economy is robust, now is not the time for complacency. This rebound is likely to fade as the economic scarring caused by the pandemic starts to crystalise with the winding down of government support. The recovery is also likely to be dramatically uneven across different sectors, locations and groups of people.

The extension of the Coronavirus Job Retention Scheme will mean that the peak in job losses is lower than in recent recessions. Unemployment remains on course to peak towards the end of 2021, once the furlough scheme expires and those who stopped job hunting during the pandemic look to return to the workforce as restrictions ease.

Although the furlough scheme will limit the peak in job losses, the uneven economic damage caused by coronavirus may drive a two-track jobs market recovery, with skills shortages in sectors where activity rebounds quickly, but with young people now entering the workforce and those whose lost their job during the pandemic at particular risk of longer-term unemployment.

With many firms struggling with the damage done to their cash flow and revenue by over a year of coronavirus restrictions, the risk of a marked rise in insolvencies as government support winds down remains uncomfortably high. Without additional support, the rebound will only be short lived.

The economic scarring caused by coronavirus, including elevated private sector debt levels, high structural unemployment and weak investment, may mean that the recovery is slower than many, including the Bank of England, currently predict. It may also mean that the recovery is dramatically uneven across different sectors, locations and cohorts of people.

Sectoral damage

In Q2 2020, the first quarter after the crisis began, key indicators from the BCC’s Quarterly Economic Survey saw the largest and sharpest declines on record. For instance, 73% of businesses overall reported decreased domestic sales, 72% reported decreased export sales and 64% reported decreased cash flow.

However, the picture has been even worse in consumer-facing industries such as the hospitality and catering sector. 94% of these firms reported decreased domestic sales and decreased cash flow. The collapse in revenue has meant that these firms are among the least able to retain and recruit staff and are amongst the most reliant on government support for survival.

These firms have also been least likely to show signs of recovery in subsequent quarters. In the most recent data for Q1 2021, for example, 81% of hospitality and catering firms reported decreased cash flow, compared to 41% overall.

As well as consumer-facing industries bearing the brunt of the crisis, smaller firms have also been disproportionately affected. For instance, businesses with fewer than 50 employees have been consistently more likely to report worsening cash flow.

In Q2 2020, the BCC’s QES found that while 57% of medium and large firms reported decreased cash flow, this figure rose to 65% for small and micro firms.

Two-speed recovery for local communities

Whilst business confidence and employment intentions are rebounding to a degree, taken together, the trends we have described here create serious problems for many local communities. For example, areas which are heavily dependent on the worst-affected sectors are likely to struggle more than others which, might lead to ‘levelling down’ compared to areas that rely on, for example, the services sector.

With all the other factors taken together, we foresee clear risks to the recovery and to our communities of an uneven recovery.

To see the full report and the Chamber network’s recommendations to government visit: Rebuild – Build Back Stronger.pdf (chamber-business.com)

Bedfordshire

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