06 Jul 2020
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The Office for National Statistics (ONS) have released figures showing that Gross Domestic Product (GDP) fell by a staggering 20.4% in April this year, the most significant fall since the Second World War. During the Global Financial Crisis, GDP fell by around 2% per quarter, which puts into context just how sharp and brutal this drop was. Certain sectors such as hospitality, travel and arts and entertainment have suffered the worst decline since the 1960’s. The world in general is struggling to cope with the economic downturn caused by the coronavirus.
The shrinking economy has prompted the lifting of lockdown globally, but are we moving too fast? We need to get people back to work to recover from this crisis, but the mixing of employees and commuters and the reopening of the hospitality sector could be the catalyst to a second wave of infection.
The ONS produces a survey each fortnight. The Business Impact of Coronavirus Survey (BICS) showed that 77% of businesses had reported that they were continuing to trade through lockdown but only 30% stated that their financial performance hadn’t been affected. The survey shows that 64% of businesses have sustained a decrease in turnover during the lockdown period and approximately 22% of those businesses by more than 50%. Not surprisingly, the main sectors to have been affected are the arts, entertainment, recreation, accommodation, food services and construction.
Data released last week shows that 80% of businesses were trading during the two weeks prior to the 14th June. 6% of companies started trading within those two weeks meaning that 86% were trading by the 14th June. Another 4% were intending to start trading during the second half of June, moving the total from 77% to 90%. June has seen a significant positive shift with many businesses starting their road to recovery. Some companies, however, won’t be able to sustain the losses and will have no choice but to close their doors.
If the immediate future is local lockdowns, there will be less devastation to the nationwide economy, but smaller businesses may suffer. Companies that aren’t prudently run or don’t have reserves are likely to go under. Large companies in the retail space such as Intu are clearly in serious trouble and smaller retailers are having to change their business model to become online distributors to stay in the game. GDP fell because people were forced to stay at home and not because there was an underlying issue with the economy. Demand is still present and with 90% of businesses now up and running, we should see a snap back.
However, we do need to consider people’s behaviour and how this will affect business recovery, particularly in certain sectors. More downward pressure may yet be exerted on the high street; the new shopping experience may not appeal, and the risk of infection is still present, making people question whether they should abandon the high street and continue to shop online. Companies like Amazon that have invested in a platform and distribution model are perfectly positioned to flourish throughout this crisis and the change in people’s behaviour will only serve to fuel this accelerated growth, allowing Amazon to take an even greater share of the market.
The effects on some sectors and businesses could be severe, while other areas will evolve and develop. The arts and entertainment sector, along with travel and hospitality, could face huge challenges for the remainder of the year, whereas the housing market seems to have gone into overdrive and is already experiencing a sharp recovery. During lockdown, people have had time to consider whether their house provides everything they need. They are anticipating working from home more in the future and there are months of pent up buyers and sellers out there, creating a buoyant market.
It’s worth considering too that offices may be replaced by housing. Some businesses have managed to run successfully with staff members working from home and may no longer consider renting offices as a necessary overhead. Shared, temporary office space for meetings could be the way forward, causing a longer-term shift as people are more focussed on comfortable and spacious domestic accommodation.
Coronavirus has plunged the world into a crisis like no other, but businesses are coming back to life and global growth is expected next year if the pandemic continues to fade. Life is and will be different, but our ability to adapt will get us through and will allow us to prosper again.
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This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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