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The Coronavirus outbreak in the UK and around the world has been really tough for all of us to watch over the last few months. Even if the virus has not affected you, your family, or your friends yet, we all harbour deep fears and rising anxiety about our loved ones who are members of vulnerable groups.
How do you loosen the lockdown so that people can get back to their normal lives? (Whatever ‘normal’ will be in the future, of course). Nothing is more sacred than human life, however, this absolute fact should not conceal from us the realisation that the economic hardships that millions of us will go through as a result of a deep and potentially prolonged recession is another and a very real form of human tragedy.
Would you be a politician right now, with the kinds of decisions they have to make? According to the Telegraph, HM Government will borrow more in the first four months of this year than it did in the 12 months of 2009 when the world was fighting the financial crisis, which led onto the Great Recession.
In this article, we’ll consider the likelihood of the different types of recession we might face in the coming months and years.
A V shaped recession
Economists characterise the length of a recession and the recovery from it using letters – a V shaped recession is a period of negative growth followed quickly by a rapid bounce back in activity.
Many feel that a V shaped recession is the likely outcome if the lockdown is lifted essentially in one fell swoop. The damages to personal and corporate finances would be limited to a few weeks’ revenues and offset by the various financial support schemes put in place by the government.
Most of the debt-based support schemes do not require corporate borrowers to begin paying back their facility until well into 2021, at the earliest. This would give businesses enough time to get back to their previous levels of turnover and profitability and the impact of the additional fixed costs of repayments would be marginal (hopefully).
In this scenario, as consumers, we would feel little or no constraint in spending money on holidays, luxuries, and non-essential purchases and our behaviours would barely be altered from how they were pre-COVID. Business decision makers would refocus on capital investment projects, growing market share, and taking on new members of staff.
According to an Ernst Young survey on the 22nd March, 38% of company leaders expected a V shaped recession with activity returning to normal in Q3 (July, August, September) of 2020. However, in a more recent analysis, Keith Wade, chief economist and strategist at Schroders, believes that hope is fading of a V shaped recession the longer this goes on for.
A U shaped recession
A U shaped recession is characterised by an economy stabilising but not growing for months or years from the level it sunk to following a slump. When the recovery does come, it’s fairly rapid and the economy grows back to and surpasses its pre-crash levels – the Great Recession was an example of this.
Unfortunately, the Great Recession may not be an ideal case study for the UK though. That’s because, despite the growth the economy enjoyed for years on end, gains in productivity, wages, and profitability were slow. 54% of the respondents to the Ernst Young survey expected a U-shape to the recession with the economy not recovering its losses until 2021.
An L shaped recession
An L shaped recession starts off with the same appearance as a U shaped recession, however, the economy bumps along at its post-crash level for a much greater duration and it only grows gradually in the months and years following that negative plateau.
Just 8% of the Ernst Young respondents thought this would be the likeliest outcome believing that economic activity would not pick up until 2022 at the earliest. It would be interesting to find out what their thoughts are now halfway through May.
Which type of recession is it likely to be?
Given how nervous British people are about lifting the lockdown, it seems unlikely that, as described above in the V shaped scenario, consumers and business decision makers would behave in the way that they did pre-coronavirus.
The severity and length of the recession seemingly depends on:
- how long lockdown goes on for;
- how “safe” we all feel;
- how insecure people and businesses are about the future financially; and
- how much cash they have left in the bank.
Many businesses have very fine profit margins making it difficult for them to successfully endure a drop in revenue without having to lay too many employees off and without having to downsize their entire operation.
Consider Rick Stein – the TV chef. He has built an impressive number of businesses in the last 30 years which, in the financial year to 2018, accumulated £16.8m in turnover between them. Hospitality margins are slender and, on this turnover, he made a pre-tax profit of £489,000 – barely 3% on which he would have had to pay 19% corporation tax.
Hospitality businesses benefit from being able to bank significant sums of customer money with an almost immediate settlement from credit card companies however they are hampered by very high fixed costs and costs of goods.
Mr Stein has shown himself to be a very talented businessperson able to make money in a highly competitive marketplace but his business, like many others, can not cope with a disruption of even a few weeks of revenue. He courted, in the opinions of some, unfair criticism by telling his staff that the cash was not there to pay them and that they’d have to wait for the furlough scheme to come into operation.
UK plc is facing a double whammy.
First, the longer the disruption, the fewer cash consumers and businesses will have available to spend and invest. Second, the lack of a vaccine will likely change people’s behaviours as long as they perceive that there is a threat to them and their loved ones.
If the lockdown is lifted three weeks from now and, concurrently, people’s confidence in their own good health and wellbeing is high, we might just get away with a U shaped recession.
Any longer and we fear it’s going to be a long and bumpy road ahead for us all for a long time to come.
An Opportunity?
That said, every big event such as now creates opportunities. We can ‘reset’ personally and professionally to make things better in our microeconomy thus impacting our macroeconomy overall. For example:
- Could you ‘pivot’ your business or change the focus temporarily or permanently to survive and ultimately thrive?
- Could you change your business ways of working, to be more flexible and potentially save costs?
- Could you make decisions to buy local, support small businesses?
- Could you change the impact on the environment of your personal and professional practices?
…we are sure there are many more we haven’t mentioned here. We’d love to discuss this more with you.
Commercially-focused advice and support during the recovery
Each business is different and each business needs to approach this situation in its own way. Here at Black and White Accounting, our accountants and business advisers have worked with clients for over 20 years helping them to make the most out of every opportunity and to overcome both near and distant challenges to future and ongoing success.
Right now, we’re receiving dozens of calls every week from business owners who want to understand their business and their marketplace better – they’re determined to get through this and we will get through this together.
We appreciate all approaches and all the advice we give is in strictest confidence. We’re happy to come out to your premises for a free hour’s consultation to find out more about you, your business, and what you need to do in the coming weeks and months to survive and ultimately thrive.
For help and support planning for the future, please call us free on 0800 140 4644, or email [email protected].
