By Josh Levy, CEO of Ultimate Finance
Groundhog Day. In the North American tradition, every year on February 2, Phil the groundhog comes out of his hole in Pennsylvania. If he sees his shadow, he will retreat to his den and winter will persist for six more weeks. If he doesn’t see his shadow, winter is supposedly over and spring will arrive early. For all of us in the UK, Groundhog Day arrived earlier this year and was more akin to the film script where the main character gets trapped in a persistent loop of repetitive and unwelcome events, rather than a jovial meteorology prediction.
The third national COVID-lockdown arrived at the beginning of this month following the breakdown of the on/off tiered system of restrictions, returning to a lockdown more comparable to Spring 2020 rather than November 2020. Unlike the Spring where the initial fear and worry was, for some, partially dampened by the sunshine and the novelty factor, this time there is a greater sense of fatigue and perhaps complacency. The impact on the most directly affected sectors such as hospitality, ‘non-essential’ retail and travel is, once again, substantial. The return of school closures is a further crushing blow that will be a headache for working parents around the country and potentially limits the ability of some people to continue working.
But whilst the restrictions are similar to the Spring, there are some very important differences that give me confidence that the overall economic and business impact will not be as damaging through this period of lockdown. The first key difference is purely psychological – the impact of an accelerating and thus far successful roll-out of the vaccines provides a clear end point to the pandemic for the first time. Beyond this, the impact of lockdown is reduced by everyone now being much more prepared for the consequences. This time around, businesses and individuals have an established ‘playbook’ for how to operate through lockdown, including working from home, and there is no shock element of having to adjust for the first time, plus Government support schemes are already in place and understood. Albeit there is the cumulative strain of over 9 months of restrictions and the added burden for many of balancing work with home schooling. Similarly, the higher level of preparedness is of no consolation for the sectors where business closure has been mandated by the Government and the easily forgotten supply chain that sits behind our restaurants, pubs and retail shops.
The second key difference is the extent of the restrictions and their interpretation. Construction and manufacturing were technically allowed to operate during the first lockdown, but many operations closed as employers observed the ‘stay at home’ message, and the wider first reaction to immediate uncertainty was to cancel or defer work and orders, and utilise the furlough scheme. These actions had a circular impact on businesses everywhere. The property market was explicitly covered in the Spring closures and transactions ground to a halt as a result. This time, all three industries are encouraged to continue operating which will have a meaningful impact on activity levels. Furthermore, many businesses have found ways of shifting their business model to adapt to conditions, best evidenced by the growth in home delivery and direct to consumer services, and many have learnt to operate with a more efficient operating model and effective home working where appropriate.
Overall, I believe the new lockdown will lead to a downturn in activity that will be somewhat bigger than in November but significantly smaller than in April. This impact will still place renewed and increased pressure on many businesses, with school closures a key factor. Reports suggest higher school attendance – which is permitted for children of key workers – now than last Spring and nurseries are (currently) remaining open, which should generally be helpful. But the Chancellor has warned that the UK economy will “get worse before it gets better” and, as ever, the strength and duration of the Government’s restrictions will determine their economic impact.
There are still many unknowns. What will re-emerge of the retail, hospitality and travel sectors? How many of the Government-backed loans will be repaid? What happens to the vast rental arrears that have built up across the commercial property market? Do HMRC continue to take a supportive stance, even with a return to crown preference?
The likely cliff edge from the Spring as Government support schemes end has been long spoken about. There remain many businesses and households falling between the gaps of these schemes. State support remains critical for many and a fiscal recovery plan is urgently needed to convert this support mechanism from more than just a stay of execution into genuine hope for the future. Disruptions to international trading as businesses get used to post-Brexit rules only adds to the challenges for some. But whilst it’s a tough start to the year, the accelerating roll-out of vaccination efforts is providing much hope and materially reduces uncertainty about the eventual return to normality. It’s now a case of ‘when’ rather than ‘if’ and a strong consumer-led recovery is certainly possible.
As lenders, we’re committed to supporting businesses through the challenges and opportunities that await. And we’re very much hopeful that we’re into the final chapter of Groundhog Day!