A delicate balance between good and bad forces
What will the post-Covid UK economy look like? What it is clear, is that nobody knows with certainty. There is a mix of good and bad forces, which can affect businesses in different ways, and a lot will depend on how these forces interact among themselves.
Growth opportunities will be balanced by the inevitable risk factors still attached to the easing of the Government support measures. This mix makes it difficult to forecast what insolvencies will look like in 2021 and beyond.
Good news first. Let’s have a look at the good forces.
- The Government measures are seen as having been instrumental in stabilising the economy. Companies of all sizes have tapped into the support available during the pandemic and are still active.
- In the UK, total Non-financial Corporates deposits bring a cash-flow relief of more than 3.2 months of turnover, around 18 days above pre-crisis levels.
- Early indications show that consumer confidence is getting back on track, reflecting a lot of pent up demand, regaining of confidence and due to the vaccination being rolled out to around of 50% of the UK population and continuing at pace..
- The reopening of shops and restaurants and the approaching good season will boost consumer-led sectors as will more people starting to return to offices.
- Many people, who’ve continued to work during the pandemic, have been saving money during the lockdown (eg. saving on transport, food, clothes…). This will also support consumer spend.
- Timid signs of recovery show a +0.4% growth for GDP in February 2021, this follows a revised fall of 2.2% in January 2021 and is expected to build in coming weeks and months as restrictions ease further (read more here: https://www.ons.gov.uk/economy/economicoutputandproductivity/output/articles/ukeconomylatest/2021-01-25#economy)
- Services, Industrial output, Manufacturing and Construction sectors are starting to show growth signs in February (respectively +0.2%, +1%, +1.3%, +1.6%).
The pain points. What are the bad forces at play?
- Official statistics show that profit warnings issued by UK quoted companies – just one of the many barometers of business health – are currently at a 20-year high.
- Some companies have relied heavily on Government support and have taken on debt to navigate through the crisis. As it stands, many of the Government measures will start to fall away from June. The phasing out of these schemes will have an impact on how companies fare in the coming months.
- A lot of businesses would have cut their costs in the previous months and taken support: How long will their liquidity enable them to survive without the support? How will that pan out as the economy starts to reopen and they start to trade more normally? They could ultimately question their own viability as the support measures ease back. It is inevitable that there will be an increase in insolvencies.
- Unemployment is expected to rise in 2021 as the furlough scheme comes to an end in September. Increased unemployment will see some of these individuals having to eat into their savings and this may act as a brake on overall spending levels, confidence and growth.
Not the same destiny for everyone
Historically, there has always been a risk factor linked to economies exiting a crisis. Businesses might try to do too much too soon in an attempt to respond to the increased demand and might quickly run out of cash (for example if someone has not paid them on time and someone else is pressurising them for payment).
According to our Economic Research Department, companies are expected to use around 50% of excess cash to cover for the strong increase of input prices due to the current supply chain disruption. In addition to that, they are also expected to increase the working capital requirements in line with inventories financing and longer payment delays.
Read more about the working capital cycle.
Some will have financial difficulties and more failures could follow for this reason, with the risk of an Insolvency domino effect.
The word “crisis” derives from ancient Greek κρίσις, meaning decision, choice.
Some companies would have made courageous choices, and taken opportunities as they materialised in the pandemic era. They might have started trading with new clients or suppliers, finding partners abroad and outside EU. Some might have digitalised their business model, or adapted their product lines to new market needs.
They might have gained new knowhow, established new relationships or invested in new machineries. All this will probably support these companies in the months to come too.
Regardless of the individual situation, in an uncertain world all businesses will have similar challenges to overcome. They’ll need:
- to find liquidity to restart
- to safeguard their existing cash flow
- to restart trading on credit. As competition increases again, there will be changes in negotiation power between supplier and buyer
- To trade with new customers or business they are less familiar with
- To adapt their product lines
Read more on how Trade Credit Insurance can support your business to safely grow.
