Despite the economy experiencing the sharpest downturn on record, the equally huge policy response from Government – including access to £87 billion of cheap finance, the £59 billion Coronavirus Job Retention Scheme and £16 billion of direct grants – has helped firms to weather the Covid-19 crisis far better than many expected.
A report out today by the Resolution Foundation Think tank found that Insolvencies in 2020 were actually down by a quarter on 2019 levels, while firms’ cash holdings have increased by £118 billion, in stark contrast to an average deterioration of around £40 billion (in today’s prices) over the past four recessions.
However, the report On firm ground? warns that while the corporate sector as a whole is faring better than many would have expected given the scale of the crisis, firms in hard-hit sectors of the economy such as hospitality are experiencing major difficulties. These difficulties risk turning into widespread insolvencies and redundancies unless action is taken, it warns.
More than half of hospitality firms have fewer than three months’ worth of cash reserves left, up from 36 per cent in September. These firms say they are far more likely to close sites or make redundancies over the coming months.
The Chancellor should provide direct grants targeted at firms in these sectors most affected by ongoing restrictions in the upcoming Budget, says the Foundation, building on the grants announced at the start of the lockdown in January.
On firm ground? says that prospects for a broader economic recovery risk being weighed down by uncertainty about the path out of the pandemic and timetable for easing public health restrictions.
Finally, the report says that while overall corporate debt levels are not a major concern, the cheap loans that have helped firms through the crisis will, in some cases, risk holding back the UK’s recovery. Where they have left firms overindebted, this will discourage investment and hiring, creating a new class of Zombie firms’ that operate to service their debts, rather than expand and grow.
In order to tackle this risk, the Foundation says the Chancellor should avoid offering a fresh tranche of business loans. Instead give he should banks a clear incentive to address problems faced by some firms, by transferring 20 per cent of the liability of the Bounce Back Loan scheme to the issuing banks, in exchange for a fee.
Jack Leslie, Economist at the Resolution Foundation, said:
“Over the past year, businesses have experienced both a huge economic hit and an unprecedented policy response from Government. This response has been very successful in preventing firms from going under, and even helped them to boost their cash reserves.
“But while the path to recovery is now in sight, business still face huge problems ahead. Firms in social sectors like hospitality are running out of cash, and many are likely to shed staff or fold altogether unless further targeted support is provided.
“In his upcoming Budget, the Chancellor should extend business support to help firms through what is hopefully the last phase of the crisis. But he also needs to look beyond the pandemic, and ensure that some firms’ higher debt levels don’t reinforce Britain’s poor investment record that was holding back growth long before the current crisis began.”
