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.
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.
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.”
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.
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?
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