Business has come to a halt. A few weeks ago we were fretting over how to run our businesses from day-to-day. Talk of downturns and the decline of the high street were secondary to meeting customer needs and paying our bills. Overnight it all changed when the UK went into lockdown and we had to close our doors and send staff home.
The Office for Budget Responsibility (a part of the UK Government responsible for forecasting) has predicted a 35% drop in the UK’s economy. The largest recorded fall has been caused by the Coronavirus lockdown and is hardly surprising. Overnight the country closed for business and many of us were furloughed, sent home to work or just laid off.
A drop of that size isn’t unexpected. What’s more surprising is the OBR is also predicting the UK will bounce back and by the end of 2021 be pretty much where it started.
I’ve been modelling the impact of lockdown in the UK. My models have been updated every couple of days using data, surveys and reports from reputable sources to give me an idea of how things are playing out. They’ve created pictures of how the economy is going to behave once the lockdown ends and we can all step outside.
The best case: A firm bounce
Update on 17th April 2020: The UK Government has announced a further 3 weeks of lockdown. This scenario is now extremely unlikely and I’ve all but abandoned it.
One of my models produces a similar result to the OBRs. To drive this result, it assumes the lockdown lasts no more than 6 weeks.
This is about the time that a critical mass of consumers will feel the financial effects of the lockdown. A fall in income from reduced wages will meet the first bills due since lockdown. A lot of people will be tapping into their savings, hoping things end soon.
It’s also about the time that companies who had 3 months of working capital start to run into problems and may not have enough cash to restart properly.
Pre 6-weeks my model suggests a brief surge in spending as we all breath a collective sigh of relief and – for want of a better word – treat ourselves. The surge lasts for 3-4 weeks as full wages filter through and cashflows resume. Things settle down and over the next 12-18 months the economy recovers to pre-lockdown levels.
Assumptions are unravelling
But there are problems with this scenario.
It assumes business can switch back on quickly. But can it? Supply chains are disrupted, there are morale issues for teams coming back, and cash flow is up the creek.
It also assumes there’s a large cohort of people who have money they’re ready to spend but can’t. There is some evidence of this – but is it enough to kickstart the economy? Experience from China suggests it may not be.
Finally, it assumes other markets are switched on fairly soon after the UK (if they’re not already).
All of these assumptions are being undone quite quickly. As time passes and the assumptions are proven false, so the “Best Case Scenario” dwindles fast.
Is a stepped recovery more likely?
If lockdown lasts 4-10 weeks a more likely scenarios is we get a modest surge in spending as demand is released. However, consumers will be more nervous about spending, and businesses will grapple with cash flow problems.
There’s no “bounce” driven by pent-up demand. Instead a series of “jumps” happen as cash flows improve, and demand and confidence stabilises. All of this plays out over a few weeks.
After that it’s a slow drag over 3-4 years to get back to pre-lockdown and we’ll probably lose 5% of businesses over the next 12-18 months.
The long haul back to health
The worst case comes about if the lockdown runs on for 10 or more weeks. People and businesses will run out of money in increasing numbers. Companies will fold, people will go bankrupt. If this happens a deep depression follows with double digit business failures and the recovery takes anything up to a decade.
Brexit, the April factor and Lockdown 2
There are limits to these scenarios. None factor in the impact of Brexit, which is still slated to happen on 31st December 2020, regardless of the pandemic. With negotiations delayed and pressure within the EU to support businesses within the state, a positive outcome is unlikely.
Nor do they factor in April 2021, which is when interest free loans turn to commercial rates. At this point the debt burden may prove too much for some companies, triggering a new wave of failures.
A final issue is the potential for a second outbreak prompting another lockdown. Asian countries that appeared to have infections under control are experiencing a second wave. It’s possible this will continue to happen globally until a vaccine is found and administered.
If there is a longer lockdown or signs of the economy struggling, it is likely the Government will step in. What form this will take is anyone’s guess.
My models aren’t to show how the economy might change – it’s to help me understand what businesses can do to survive what comes next. I’ve already written on general principles for surviving a recession, and I’m aiming to produce something more specific to the lockdown.
To stay up to date on my research and analysis, follow my commercial Twitter account – Dalmeny Close.
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