The Road to the “U-shaped” Recovery


The Bank of England has recently announced that it expects the UK economy to shrink by 9.5% this year, which would make it the biggest annual decline in 100 years and will inevitably lead to one of the sharpest recessions in history. Unemployment is also anticipated to increase to 7.5% once the Government’s Coronavirus Job Retention Scheme (“CJRS”) comes to an end. Whilst all of this seems extremely bleak, and not out of place in a Dickens’ novel, readers should take heart that the Bank of England has improved its forecasts since May, when its initial estimate showed a contraction of 14%.

The Bank believes that the UK economy will grow by 9% in 2021 as business bounces back albeit at a slower rate than previously forecasted (of 15%, again back in May). This slower recovery shows that the Bank is anticipating that the pandemic is having a bigger effect on business than originally envisaged and they have also stated that their current forecasts have been based on a large number of unknowns with the outlook very uncertain at present.

What does this mean for UK businesses?

The CJRS has now started its wind-down, with businesses expected to contribute towards the costs from 1 August 2020, at an increasing rate, until the scheme is phased out at the end of October. Unfortunately, the lockdown has lasted longer than originally anticipated and the number of retailers and casual dining outlets that have signalled that they are having to use formal insolvency processes is evidence that consumer confidence remains at a relatively low level. For example, one in six mortgages in the UK is currently subject to a payment holiday because of the pandemic. For those business owners operating in the leisure and hospitality sectors, where discretionary spend is important and where consumer spend remains subdued (despite the Chancellor’s best efforts), the Bank’s latest press release will not make them feel any more confident.

And whilst the CJRS and other Government support schemes have undoubtedly helped businesses to stay afloat in the short term, it is widely anticipated that there will be significant job losses once the CJRS closes. Given the current restrictions imposed on our lives (with those of us subject to local lockdowns seeing enhanced restrictions), the potential for job losses will not come as a surprise.

Forewarned is forearmed

Given that the Bank of England is anticipating an increase in unemployment, this suggests that they will expect businesses to struggle in the coming months. During lockdown, business advisers were busy helping their clients to manage their cashflow to get them through the lockdown period, however the focus on cash may have withered somewhat recently, as businesses have been focusing on how they can start back up again and businesses have had more cash due to the deferral opportunities for various obligations. Needless to say, if the Bank is expecting the UK economy to shrink, businesses will feel the effect of that and they therefore need to start to think about what the next few months will look like from a cash perspective.

There will be plodding ahead

The idea behind a “U-shaped” recovery is that it has a relatively flat line until the economy is able to pick up again, which will hopefully be by the end of 2021. This comes from the lack of consumer confidence, uncertainty around jobs, the withdrawal of Government support and also an increase in debt for businesses. It is anticipated that business investment in particular (with the likes of capital expenditure) will be subdued whilst business owners look to use their spare cash to pay back debt rather than invest in their business in the short to medium term. That means that business owners will need to have patience and refrain from panicking if their growth is not as previously envisaged – many businesses will not make a profit and business owners need to be prepared for that – making losses does not mean that your business is insolvent but it does mean that you need to manage your position.

Consider your cashflow position

If your business has been impacted by the lockdown and continues to do so, reviewing overheads will be an appropriate step to take. If your turnover has been adversely impacted, the chances are that you will have less cash available and you will need to review the costs of your business to understand where you can make savings.

Cash flow forecasting should be undertaken to establish whether you have sufficient cash available to meet those deferred obligations – if you think you are likely to struggle with paying the deferred debts when they are due, you need to deal with it head on – please speak to one of our team if you need assistance with this.

And finally

There will be difficult times ahead for everyone but most definitely for many business owners. Lockdown may be over on a national basis (for the time being at least) but the recovery will take time and many businesses are unlikely to look the same as they did pre-Covid, and there are positives to take from that too – this should be seen as an opportunity to redefine and build resilience, even if there is some pain along the way. Please get in touch with us if you have concerns about your business; whilst the road to recovery will be a rocky one, it doesn’t have to be a path you take alone.

If you need any assistance with your business, please get in touch

Contact Heather