The economic effects of the coronavirus pandemic are only just beginning to show. While government economic measures have undoubtedly saved thousands of jobs and hundreds of companies across the UK, the economic toll of the pandemic will be felt for many years to come. Schemes such as the Coronavirus Job Retention Scheme (CJRS; or furlough) and ‘Eat Out to Help Out’ have cost the government billions of pounds. The peak of the furlough scheme saw 8.9m workers paid 80 per cent of their salaries to stay at home and last year the total weekly hours worked in the UK fell to its lowest level in two decades (BBC). This combination of increased spending and reduced productivity has resulted in a total cost to the UK taxpayer of £271bn (National Audit Office).
One thing is certain – spending cannot continue at this rate. Recent reports from the European Union (EU) indicate that there will be a significant increase in bankruptcies and bad loans post-pandemic. Without government aid, almost 25 per cent of EU companies would have become insolvent last year (City A.M). EU ministers are concerned about the number of companies which are relying on economic support in order to survive. These trends are likely to be mirrored in the UK once the pandemic subsides and economic measures are lifted.
A fake economy?
The government economic measures mentioned above have certainly achieved their short-term goal of preventing mass unemployment and corporate insolvency. This has been possible by creating what some are calling a ‘fake economy’, where many businesses are kept afloat by government measures alone. It will not be clear how many of these companies can survive post-pandemic until all government measures are lifted and normality returns. Some may have also been fooled by the idea of a V-shaped recovery, where the economy grows very rapidly after a crash. Though an economic bounce back would be encouraging, it could also lead to complacency which threatens long-term recovery (Bloomberg).
Those companies which do survive the pandemic will either need to restructure their businesses to remain afloat or face formal insolvency processes. While these processes are a natural end to the lifespan of a company, we will likely see an unprecedented increase in their frequency over the next one to five years. A worrying number of companies only exist today because of government financial support – the question is how many will remain once they are forced to survive alone.
The tip of the iceberg
While the world has endured over a year of coronavirus restrictions, the true impact on UK businesses has only recently started to become apparent. December 2020 was the first month during the pandemic where the total number of company insolvencies was higher than in the previous year (The Insolvency Service). This highlights how successful the government support schemes have been in preventing a sudden rise in insolvencies since the outbreak, although also indicates that these measures are unsustainable long term. Economic support schemes appear to have simply delayed the inevitable. We should therefore expect to see increasing numbers of insolvencies over time as support is reduced.
Although the economic situation indeed appears dire, new legislation such as the moratorium will provide UK businesses with breathing space with which to overcome insolvency problems. The success of the vaccination program may also see a resurgence of the UK economy by summer 2021. Perhaps a combination of government support, new legislation and scientific advances will prevent the large-scale death of companies as predicted by the EU. Nonetheless, we need to hope for the best case scenario, but plan for the worst. This means thinking of new ways to support businesses post-pandemic to minimise the long-term effects of the virus. Whatever the outcome, restructuring advisory services will surely play an increasingly important role in the recovery of the UK economy in the years to come.
For more information on how you can protect your business from the impact of the coronavirus pandemic, contact Mark Wilson.