The Recession Rears Its Head: What Does The Crash Mean for Me?
Since the spread of the coronavirus forced the UK’s economy to a standstill at the start of March this year, its impact has been sending ripples of devastation through just about every sector of business. However, even though the economic consequences of Covid-19 have been evident since the virus hit UK shores, experts predictions were only confirmed on the 12th of August when the Office for National Statistics (ONS) announced how the UK fared in the second quarter. In their release, it was revealed that the UK’s economy fell by a whopping 20.4% between April and June of this year, which officially makes the UK the hardest-hit country in Europe by Covid-19.
So, unsurprisingly, as we collectively start to come to terms with this new economic reality, the paths of recovery that lie ahead of many small to medium-sized businesses (SMEs) remain uncertain. From the risks of a second wave, the repercussions of mass unemployment, a potential increase in taxation, and the imminent withdrawal of government incentives like the Job Retention Scheme, there are so many factors that threaten SMEs abilities to thrive or even survive through the wake of this Covid-19 pandemic.
But as the relaxing of lockdown regulations already have started to breathe life back into many sectors that were initially hit hard by the impact of the virus, the nature of this current recession appears to deviate slightly from the ones that have come before. So, to truly gauge how the Coronavirus Crash will impact your SME, it’s important to explore what a recession is, why the one we’re about to experience is unique, how it’s likely to affect the prosperity of businesses overall, and how it’s affecting separate industries differently.
Defined simply as a period of decline where the economy contracts over a six-month time span over two successive quarters, a recession is normally measured by a significant loss of gross domestic product. The primary impact of recessions is usually seen first in a fall of consumer demand, which results in a reduction of sales, which then has a knock-on effect on the retail, services, and manufacturing industries. The average length of a recession is around 11 months, and although there is no limit to how long a recession can last, if it persists for longer than three years and sees a GDP decline of 10% or more, it is commonly referred to as a depression.
While the first three months of 2020 saw the UK fall into a 2.2% slump before the impacts of coronavirus were even realised, the imminent lockdown that the nation was forced into threw many industries into complete upheaval. Although almost no industry in the UK came out of this unscathed, a big reason why the economy suffered to such an extent was because of the massive hit to the service sector, with this industry suffering the biggest quarterly decline in recorded history.
The service industry comprises a mighty four-fifths of the UK’s economy and three-quarters of its GDP, so the revenue that it generates significantly contributes to the functioning of our economy. Spanning across many different sectors such as entertainment, retail and finance, the nationwide lockdown implemented in early March caused the industry to shut up shop overnight, which led to a sharp decline in profit for most UK businesses.
While the massive hit to the service industry was a primary reason behind the Coronavirus Crash, there are a variety of other issues that contributed towards its onset and that increased its severity. Among them, is the government’s slow initiation of a lockdown in the first place. Boris Johnson and other top-ranking members of the conservative party have been under fire from many people including the expert Samual Tombs from Pantheon Macroeconomics for not acting fast enough to contain the virus. Among other factors, he pointed out that the government’s sluggish response to Covid-19 resulted in the virus spreading much further than it should have, which was understood to contribute to the economy’s sharp decline in the second quarter. Although many factors stand behind the UK’s emerging recession, this delayed response to containing the virus is likely to be a significant reason why the UK has appeared to perform so much worse than our European neighbours.
With the UK economy shrinking by a fifth in the wake of Covid-19 and around 2.7 million Britons currently identifying as unemployed, it’s no surprise that many small and medium-sized businesses scattered across the UK are facing a turbulent economic situation. In addition to this, the bank of England has predicted a 9.5% drop for the whole of 2020, so the situation isn’t expected to improve significantly before the end of the year. The impact this has had on SMEs has been highlighted in a recent survey by Simply Business, where it concluded that coronavirus had created upwards of £69 billion of damages to small businesses in the UK. To break this down further, it’s estimated that the average small business has witnessed a loss of over £11,000 since the start of March, and no sector of the UK has been exempt from this impact.
While these figures may appear sobering, the UK government has taken various steps to cushion this economic blow, with stimulus packages like the Coronavirus Business Interruption Loan Scheme (CBILS) being made available since the country went into lockdown at the start of spring. The financial measures are aimed at tiding businesses through the worst of the lockdown while also helping to provide them with the means to recover as social distancing restrictions continue to be lifted. These loans can reach up to £5 million per business, and due to a recent change in the approvals process, more businesses can now apply for these loans.
In addition to beneficial government incentives, the nature of this coronavirus-induced recession is likely to bring about a much faster economic rebound than others. Due to the fact that consumer demand is predicted to continue to rise as our society recovers from the virus, many experts believe that the UK market will experience a ‘V-shaped recovery’. This means that the financial impact of the virus will likely be easier to recover from in contrast to previous recessions because most sectors of businesses are expected to pick up to healthier levels once the worst effects of Covid-19 are behind us.
Unsurprisingly, the hospitality sector was one of the worst-hit by the novel coronavirus. As figures published by the Office for National Statistics have shown, the hospitality sector was initially impacted more heavily than any other, due to its heavy reliance on in-person trade. Income from the sector has been recorded to decrease by 56% in comparison with last year's earnings, and because of the enforcement of social distancing guidelines, half of all hospitality businesses are not expected to break even until the end of 2021. More specifically, the food and drinks businesses registered a decline of 83.4% in the first three months of the lockdown, with all components of the industry taking the biggest hit in April of this year.
However, despite the initial slump, the hospitality sector is showing promising signs of recovery, with its gross domestic product rising by 8.7% after lockdown restrictions began easing in June. Also, with government incentives like the widely acclaimed Eat Out to Help Out Scheme coming into place throughout August, over 100 million meals were claimed at a reduced cost due to a £500m cash injection from the treasury. With bank holiday reservations on the 31st of the month soaring up 216% from the year previous according to information provided by Open Table, the hospitality sector received a well needed financial boost. However, despite the scheme prompting a massive increase in consumer demand, as government funding winds down, many people working within the industry fear this success won’t last into the winter months.
With the retail sector employing around 1 in 12 UK workers and accounting for almost 5% of our GDP, its success is critical to the survival of our overall economy. Unfortunately, due to the nature of the Covid-19 pandemic, the industry has been massively disrupted, and a stark difference has emerged in the way that different types of retailers have been impacted. For instance, there's been a large deviation in the way that shops that operate online versus in-person stores were affected.
Since the pandemic has forced thousands of small and medium-sized non-essential retail stores to close their doors back in March, many sadly haven’t been able to recover through the lockdown period. Even some of the UK’s biggest high street retailers have announced drastic measures to deal with these losses, with John Lewis shutting down 8 UK stores and Boots axing over 4,000 jobs. The economic dent that Covid-19 has caused to brick and mortar shops has only threatened the industry even more, with online shopping already trumping in-store sales by a whopping 4 to 1. So, the extra impact that these lockdown measures have on offline stores only increases their vulnerability to going out of business.
By contrast, with many people turning to online shopping when all but essential shops in the UK were banned, ecommerce rates have been booming as a result. The sector witnessed an expansion of 55% from 2019 in the first seven months of the year, and even industries like apparel are showing signs of recovery with the sector growing in 3.6% from last year. Therefore, due to the acceleration of ecommerce alongside the in-store regulations that are currently making big changes to the in-store shopping environment, the retail sector is likely to make irreversible changes in the wake of this pandemic as new consumer behaviours are continually being forged.
Due to the lack of demand in traditional manufacturing services, the manufacturing sector has also been hit particularly hard by the coronavirus. According to a report by Irwin Mitchell at the Center for Economic Business Research (Cebr), the UK manufacturing sector lost a total of £540m since the onset of Covid-19, with the GVA falling by roughly 75% a day. Even though the industry isn’t subjected to the same strict regulations as non-essential travel and working, it has instead been impacted due to a reduction in consumer demand. As struggling businesses throughout the UK are finding ways to cut their expenses in order to survive this troublesome period, the UK manufacturing market is almost being put on hold completely, as retailers are either switching to using countries with cheaper overheads or freezing production completely.
However, despite this initial lack of consumer demand, as other industries are starting to find their feet again and people are returning to work, the construction sector is finally witnessing widespread growth again. This industry’s journey back to business-as-usual still may take a while due to their requirement to adhere to strict social distancing measures. However, the sector is likely going to recover faster than many others because of the stable demand it is now receiving.
The Covid-19 emergency spelt an absolute disaster for the arts sector, with over 400,000 people’s jobs understood to be put on the line since the country went into an official lockdown in March. Dubbed by many experts as a ‘cultural catastrophe’, the economy of the sector was also rocked hard, with £1.5 billion lost from the creative industry every week, totalling a combined £77 billion of losses since the onset of the virus at the beginning of the year. Unsurprisingly, with this significant loss of revenue, job security in this sector has been extremely low, and it’s been estimated that 1 in 5 creative jobs in the country have been lost as a result of the pandemic.
The reality for many small and medium-sized businesses in this sector has been particularly sober, with many being hit harder than SMEs operating in other sectors due in part to a lack of adequate government funding. Despite actions like the Job Retention Scheme, 119,000 permanent creative workers are estimated to be made redundant by the end of 2020 with 287,000 freelance roles also understood to be put on the line. This makes the creative industries one of the hardest-hit sectors in the UK, which makes it particularly vulnerable to the impending economic recession that we are facing.
This ‘cultural catastrophe’ comes as an even bigger disappointment given that before Covid-19 the creative sector was growing at five times the rate of the wider economy, even more than the aerospace, life sciences, gas and oil industries combined.
While government-sanctioned guidelines may not be under your direct control, Covid-proofing your business to help your customers or potential clients to feel relaxed, assured, and safe is a great way to help your business to get off the ground. Whether your operating a service, manufacturing, or office-based business, every business in the UK is required to adhere to social-distancing and health and safety guidelines, so instead of letting it be an obstacle to your success, finding creative and fun strategies to implement these guidelines may just help your business to attract interest and stay ahead of the competition.
If you’re worried about bearing the brunt of the coronavirus crash, remember that you don’t need to go through this alone. The government has introduced a variety of schemes that are targeted at providing relief to small and medium-sized businesses across the UK. Specifically, the Coronavirus Business Interruption Loan scheme is targeted at providing financial backing to smaller businesses that have been affected by the impact of Covid-19. The Coronavirus Future Fund issues convertible loans that range between £125,000 to £5 million to innovative companies which are facing difficulties due to the coronavirus outbreak, and the coronavirus Bounce Back Loan (BBLS) helps small businesses to access finance more quickly and efficiently, so they’re able to get back on their feet.
For more information on these loans and how to apply, visit the GOV.UK website.
Does your business not qualify for the government loans or are you in need of a slightly bigger cash injection to tide you through to more stable times? Don’t fret, private business loans may help your business to stay on its feet until the worst of the Corona Crash passes. At Market Finance we operate fast, fuss-free loans with straightforward rates and personal service, so you’re able to feel supported through every stage of your application process. Our interest rates start from as low as 1.9% APR and you’ll be able to receive your funding after completing 4 simple steps.
For more information on our business loans, the application process, and other funding solutions just take a look at our site, here.