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How much will COVID-19 cost UK businesses?

Launching a £350bn package of measures to support UK businesses during the coronavirus crisis on Tuesday 17 March, Chancellor Rishi Sunak said the sum represented 15% of UK GDP. AccountingWEB takes some initial soundings to assess whether these vast sums will be enough to address the full economic impacts.

19th Mar 2020
Editor in Chief (interim) AccountingWEB
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The UN's trade and development agency (UNCTAD) says the slowdown in the global economy caused by the coronavirus outbreak is likely to cost at least $1tn. 

UK’s share of global output is estimated by different economists between 2-3%, so £330bn seems like a sensible benchmark for the government’s current rescue plan. But is the UNCTAD estimate too low? And will the UK government response be sufficient?

At the time of the Budget, the Office for Budget Responsibility estimated the impact of coronavirus on GDP growth to be 0.1%-0.5%, equating to around £2bn-£5bn of the ONS 2019 estimate of £2.1tn for UK gross domestic product (GDP). That was last week and the model has obviously changed since then.

What is already emerging from advisers and businesses on the frontline is that the economic impacts of coronavirus are not a question of output slowing, but of disappearing altogether.

This article seeks out estimates and stories from different sectors to try and get a “wisdom of crowds” handle on the actual costs that businesses are having to face from this unprecedented crisis.

School closures

In an analysis of the economic impacts of an epidemic in his Mainly Macro blog, Oxford University economics professor Simon Wren-Lewis estimated the direct losses from a fatal three-month epidemic at around 1% to 2% of GDP.  

Bowing to the inevitable as coronavirus infections and deaths continued to rise, Boris Johnson announced at Wednesday’s emergency press conference that schools in England would close on Friday, two weeks ahead of the Easter holiday. Scotland and Wales had already done so.

According to Wren-Lewis, school closures would amplify labour shortages if workers were forced to take time off to look after children. “On the basis of the assumptions we made, if schools close for around four weeks, that can multiply the GDP impacts by as much as a factor of three, and if they close for a whole quarter, by twice that.”

So the counter is moving up towards a £100bn hit on GDP.

Empty pubs and hotels

The biggest impacts on GDP occur when we people reduce their social consumption to try and avoid catching the disease, wrote the Oxford economics don.

When the UK government asked citizens to avoid going to restaurants, pubs or entertainment venues and other crowded places at the beginning of the week, the was immediate.

According to figures from UKHospitality, in the two weeks since the impact of the coronavirus was first felt in the UK, the industry has lost between 200,000 and 250,000 jobs, with majority coming in the past week.

“Our analysis suggests in excess of one million jobs are now on the line,” said CEO Kate Nicholls. “Companies are having to make the very difficult decisions now and with many hospitality and leisure businesses now having to choose to close or massively reduce their operations, there is little chance of saving many jobs.”

Attempting to scale up the impacts, assuming £16,000 as an average annual salary in the sector, the initial hit this quarter would run out over the year at around £4bn in lost economic activity, rising to £16bn if UKHospitality’s more pessimistic outlook comes to pass.

AccountingWEB member Duggimon offered the example of one hotel client he was working with. “The timing of the crisis couldn’t be worse for the industry, which was just coming out of the winter season, he explained.

“The hotel I was preparing a cashflow for was looking to secure short term funding before the crisis hit. I'd put together figures that had to be severely revised. Looking forward to a best case scenario, we went with zero income in April and 10% of last year's income in May, slowly returning to 75% of the previous year through the summer. The hotel is having to lay off all staff, though many of them are EU nationals unable to return home, so they're looking at becoming a sort of boarding house in the meantime.”

The rates holiday and grants will make all the difference to the client, he added. “If it's only a couple of months we're looking at then they'll be OK. if it goes on longer then it could be even more.”

Retail rollercoaster

The £100bn retail sector started feeling the effects even early. According to data from Springboard, the number of visitors was 20% lower on 17 March than the same day a year earlier. On Sunday, the number of visitors had already plummeted, and was 31% lower than last year.

Laura Ashley was the first retail firm to collapse due to the current crisis after experiencing “an immediate and significant impact on trading”. According to Retail Economics three-quarters of retailers expect to see a negative impact in the next few months and before long others outlets are likely to follow 

While supermarkets are struggling with dropping footfalls and panic buying at the same time, those that operate internet delivery services are struggling to keep up with demand. The website of Waitrose-linked Ocado was suspended for three days this week and Morrisons has announced that it will be recruiting around 2,500 more workers to meet growing demand.

Construction and engineering

AccountingWEB’s Richard Hattersley brought us another representative anecdote from the heating and plumbing industry. The engineer fixing Richard’s faulty boiler said his diary has emptied since the coronavirus broke out, with multiple cancellations. His supplier, too, said that sales of new boilers had stopped in their tracks.

If all the other 120,000 registered heating engineers and plumbers are seeing a couple of thousand pounds of work disappearing every week, the impact on the economy could be running at more than £1bn a month. 

Looking at other sectors, car manufacturers contribute somewhere in the region of £20bn to economy, with another £5bn coming from associated component suppliers. Assembly plants in Sunderland (Nissan), Ellsmere Port (Vauxhall) have shut down with temporary breaks in employment for 20,000 workers who make two-thirds of the county’s cars. If the industry as a whole goes into stand-still, it would represent just under £500m in lost output every week.

The UK's fishing and fish processing industries have also come to a stop. They employ 24,000 people who help to contribute £1.4bn to the UK economy, according to a House of Commons research library briefing.

The guesstimates we’ve made about a few definable industry sectors tot up to a hit of more than £150bn on annual GDP. Compared to that, what we’re hearing from AccountingWEB members about microbusineses represents an economic void of even more significant proportions. There will be further disruptions to light manufacturing, agriculture and services companies large and small. 

Smaller businesses

According to ONS statistics, just under 85% of accountancy firms turnover less than £250,000 and AccountingWEB would estimate their typical client base at somewhere between 100-200 small businesses - the much-lauded SME heartland of the UK economy, representing around 2.5m clients based on our back of the envelope calculations.

In AccountingWEB’s No Accounting for Taste podcast this week, Bristol-based adviser Zoe Whitman said she had already lost design and hospitality industry clients from her client base this week. “We work with a lot of very small businesses and can already see this is going to cause a lot of problems for clients with cashflow and their long-term survival.

“We've just got to sit tight and be optimistic and try and help those clients that we still have and offer them services that will get them through this difficult time.”

In Any Answers, lincolnartist added: “Home-run businesses are affected in different ways. They have no big financial buffer and any unprecedented upset like this makes them struggle to have any kind of living.”

Even from this incomplete jigsaw, it looks very much like the government is going to need a bigger bucket for its economic bailout. As the article was being prepared, the Chancellor has hammering out new measures at the Treasury to address some of the concerns raised by smaller businesses and employers. These additional remedies are expected to be unveiled on Friday afternoon (20 March).

Sources of help

Until the government’s bailout programme becomes tangible, there are few places for businesses to turn other than their sympathetic accountants. For many firms, there is the hope that their business disruption insurance will provide a short-term helping hand. However the Association of British Insurers (ABI) warned this week that most businesses do not have cover if they have to shut down operations due to the virus, “irrespective of whether or not the government orders closure”.

“A small minority of typically larger firms might have purchased an extension to their cover for closure due to any infectious disease,” said the ABI. “In this instance, an enforced closure could help them make the claim, but this will depend on the precise nature of the cover they have purchased so they should check in with their insurer or broker to see if they are covered.”

In what is a bleak, unprecedented situation, AccountingWEB member Tornado offered some practical advice and called on peers to provide leadership and “use our experience and logic to help our clients in a rational way”.

In Tornado’s case, they were working with a cafe to see how it could weather the crisis and lighted on takeaway/delivery services as an option - one of the few sectors growing as a result of the epidemic. Menus for local customers in self-isolation locally was not just a way to keep trading, “That this could become a new source of income when we get back to normal,” Tornado wrote.

“New opportunities can be discovered with a little thought. I also believe that people who have created and run their own businesses are open to new ideas and are agile enough to adapt to changing circumstances when given encouragement and support. Tornado wrote.

Let us know your experiences and observations about the impacts on actual UK businesses. From what accountants are observing on the frontlines, what else do you think the government can do to mitigate the economic impacts of coronavirus?

Replies (15)

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By kirstiej
20th Mar 2020 09:23

The world economy is being mothballed for the foreseeable future. It's difficult to understand how the normal rules can apply. Even if businesses do have insurance cover, the insurance industry works on the basis that only a few of their customers will need it at anyone time. This clearly isn't the case now.

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By Michael C Feltham
20th Mar 2020 10:30

"SMEs account for 99.9% of the business population (5.9 million businesses). SMEs account for three fifths of the employment and around half of turnover in the UK private sector. Total employment in SMEs was 16.6 million (60% of the total), whilst turnover was estimated at £2.2 trillion (52%)."

Source: FSB.

"At the start of 2019 there were 5.82 million small businesses (with 0 to 49 employees), 99.3% of the total business. SMEs account for 99.9% of the business population (5.9 million businesses).

SMEs account for three fifths of the employment and around half of turnover in the UK private sector.

Total employment in SMEs was 16.6 million (60% of the total), whilst turnover was estimated at £2.2 trillion (52%)."

"The UK private sector business population is made up of 3.5 million sole proprietorships (59% of the total), 2.0 million actively trading companies (34%) and 405,000 ordinary partnerships (7%) in 2019."

The situation is dire!

Chatting to my two largest clients, yesterday, one is dead in the water; mainly since his specialised activity is pan-European; plus he has a very large asset pool and a high level of asset finance.

Another is a very successful specialised used car dealer, who also owns a hitherto busy and successful pub.

He hasn't a clue what the future holds.

Neither do I!

Surely, the core problems are:

1. A Domino Effect as increasing numbers of workers are laid off and thus cannot pay their bills, let alone purchase any new goods or services.

2. Government revenue from income tax, corporation tax, VAT, Stamp Duty etc will evaporate; yet at the same time Government are proposing to spend hundreds of billions! However, Government is already heavily borrowed in Sovereign Risk.

3. As increasing numbers of people are forced to seek assistance, then Government spending will rapidly increase.

IMHO, this economic, fiscal and financial (Monetary) disaster, is the direct result of Government from Thatcher on, focusing upon the mythical "Service Market", self-employment to "solve" employment problems caused by offshoring and an insane economy where money has flowed into ever increasing debt, excessive imports and crazy consumerism.

Plus, of course, yet more focus upon the illusory "Free Market" when there aint such thing! An Open Market, all well and good; however Thatcher and Reagan became wholly seduced by the Chicago School ideas from such as Milton Friedman et al.

https://www.ft.com/content/4a37b993-21b7-3fe3-82ab-a04c56eafdf7

Thanks (2)
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By Justin Bryant
20th Mar 2020 11:45

At the end of the day, as Governments no longer operate a gold standard, money can simply be printed by Central Banks to solve any financial problems. This is happening right now as Government borrowing (like all credit) is money creation, so I wouldn't worry too much.

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Replying to Justin Bryant:
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By Michael C Feltham
20th Mar 2020 12:14

An y nation state operating a Fiat Monetary System, which includes of course the UK and most of the Western World, CAN print money: however, eventually, in excess, such leads to Hyperinflation.

The lessons from history are pretty clear; the collapse of the German Mark under the Wiemar Republic is perhaps the best example.

Unfortunately, crazy monetary actions such as QE (Quantitative Easing), which looked lovely on paper, was disastrous. The Bank of England creating Magic Money, electronically and buying back Government paper (Bonds) was supposed to inject money into the banking system to assist UK business.

Banks being banks, however, thought "luverly!", flogged their government paper, drew the credits and dumped it all onto the equities market!

The UK's major problem is shortly to raise yet more capital on the Sovereign Risk Market; with the nation's outstanding debt, it will not be an easy sell.

Worth remembering Britain has backed itself into a dangerous corner where it has to import vast quantities of essentials; we have been running a Balance of Trade Deficit now for years (Current Account). Obviously, this has to be settled; by buying hard currencies in exchange for Sterling.

Floating Fiat currencies are valued on the success, strength and resilience of a nation or the opposite.

With a weak Pound then the import bill goes up and up and up...

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Replying to Michael C Feltham:
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By Justin Bryant
20th Mar 2020 12:33

You clearly (like most people) know nothing about the economics of money creation (and destruction). QE per se does not create money. Borrowing creates money, because over 90% of money is no more that electrons in the form of bank deposits displayed on a computer screen, so it's only if banks lend with the QE cash (that the Central bank has swapped for their non-cash assets) that money is created INDIRECTLY by QE by the lending process. Clearly, in this climate no-one wants to lend, so the only entity that can borrow money is the Government from its Central Bank (which it is doing in spades right now of course).

The Government borrowing (unlike QE) will of course devalue the £ (as we have seen this week) for the usual supply & demand reasons and thereby cause inflation.

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Replying to Justin Bryant:
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By flightdeck
20th Mar 2020 13:00

Thank you for that Justin. Do you know what happened in the last big round of QE - were the banks given money to lend? And if so, did they lend (and how much). Does the government need to learn from last time i.e. enforce the lending out bit? And, finally, do you think lending to keep a company going is as valuable as lending to say start a new business or fund expansion? On the surface I cant see the difference but I know little about macro economics.

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Replying to flightdeck:
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By Justin Bryant
20th Mar 2020 13:15

Once you understand that money can be created out of thin air (as explained above) then I see no need to worry about any very serious financial impact of this virus.

Such money creation was not possible in the Great Depression due to Gold Standards etc., so comparisons with that event are inappropriate.

People who thought QE would cause general inflation were basically thick. QE merely caused asset price inflation in financial assets (and so only helped rich people get richer) as that's what central banks were buying hand over fist, which when added to low interest rates caused such assets to zoom up in value (so propping up the stock market as Trump et al intended).

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Replying to Justin Bryant:
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By Michael C Feltham
20th Mar 2020 14:05

@Justin Bryant

"You clearly (like most people) know nothing about the economics of money creation (and destruction)"

So, banks and even central Banks can create as much money as they like without any penalty?

Quaint...

I know!

The Bank Of England can "Create" trillions of new electronic money, give every citizen £10 Million pounds; then employ everyone as a civil servant on £200,000 P.A. and life will be wonderful and we can all live in a mansion and drive around in a Ferrari!

Sounds like the John McDonnell book of economics.

However, back in reality, the concept of Credit Money Creation ignores the base reality of a value system.

One Pound (Or US Dollar etc) equates to a measure of work done, or value created etc.

i.e. Intrinsic Value.

If one bullion ounce of Gold (999.99 Fine Purity) is worth say £1,000, then the greater the money supply, then the larger the price of Gold Bullion. Inflate money supply then the price of bullion rises in lock step.

Tell me, what is the point of The Interbank Market ? Why on earth would banks need to borrow money?

Perhaps you might care to consider the case of the collapse of Continental Illinois Bank and explain how this could have happened if all Continental needed to do was create more money to keep themselves afloat?

https://www.federalreservehistory.org/essays/failure_of_continental_illi...

Same comment relates to Northern Rock and its failure: remember them?

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By Ian McTernan CTA
20th Mar 2020 11:47

We need a plan for small businesses such as ours and all the self employed, many of whom are already suffering from a complete lack of work.

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Replying to Ian McTernan CTA:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
20th Mar 2020 17:04

We're just waiting for the latest Downing St press conference, when Rishi Sunak is expected to announce the next phase of his economic rescue package.

We'll see how far he goes, who he'll be trying to help and whether there is any actual detail about how all this money is going to get to businesses and individuals and report back on Monday morning.

Stay well and keep to yourselves until then, everybody!

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By Nick Graves
20th Mar 2020 11:55

Trouble is, new money only benefits the first-receivers and only later results in inflation and recession as a result of the malinvestment earlier on.

So the Banksters will be safe - hurrah!

A lot of businesses may well have to phoenix themselves & start again.

That option is probably impracticable for the self-employed, who will probably bear the brunt of this.

It's almost too serious to be worth worrying about.

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By flightdeck
20th Mar 2020 13:17

These extreme measures better be worth it. If it were up to me I would have put a lot of effort into protecting the old and vulnerable (people with co-morbidities) and let everyone else get on with it. Businesses going to the wall and massive job losses also have their consequences. The young and able-bodied could be put to use running stuff while the aforementioned isolate.

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Replying to flightdeck:
Chris M
By mr. mischief
20th Mar 2020 13:37

I agree with that last post. A Tweet I put up to the effect that more years of quality life could be lost by trashing the economy by fit healthy people not going down the pub etc. than by shut downs got a huge response.

Last time I checked about 600 responses, which is 10 times the response any Tweet of mine has ever got.

250 or so in support.
350 or so against, many using terms like [***], moron selfish [***] and so on.

This is not just a virus, it is a mass hysteria. I start each and every day with Kipling at the moment:

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;

etc etc.

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Replying to flightdeck:
By k743snx
20th Mar 2020 13:46

I'm sure there are better uses our 14(?)bn Overseas Aid budget could be put to as things stand.

Thanks (1)
Replying to k743snx:
Caroline
By accountantccole
21st Mar 2020 08:14

Mostly we have homes and food on the table. This aid goes to people who struggle to have either

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