The economic outlook: Back to 2002

19 June 2020

Cast your mind back to 2002. The top-grossing film of the year was The Lord of the Rings: The Two Towers, while "Anything is Possible"/"Evergreen" by Will Young was the UK’s best-selling music single; Tony Blair was still the Prime Minister; Crocs and velour tracksuits were the height of fashion; Arsenal won the men’s Premier League, while Brazil’s men’s team won the football World Cup, hosted by Japan and South Korea; and monthly GDP was at around the same level as it was in April 2020, according to figures released by the ONS last week.

The pandemic has wiped out almost 18 years of economic growth, with the UK’s monthly economic output dropping to £78.9 billion in April of this year, a level last seen in the summer of 2002. The month-on-month fall of 20.4% between March and April is the sharpest drop on record, and follows an already-startling fall of 5.8% between February and March; in all, the change in GDP (February-April 2020) was -25.1%, a staggering decrease.

Corporate insolvencies

It is clear that we are in the midst of an economic downturn, with many businesses sustaining damage as their reserves are eroded while new debts build up. However, the corporate insolvency statistics for the month of May in England and Wales were lower than in the previous month, just as April saw fewer corporate insolvencies than March. As our comments on the statistics explained, our members tell us that the support packages made available by the Government have played a highly significant role in keeping many companies afloat, and – as a consequence – in protecting many workers’ incomes, helping to contain the damage to personal finances.

These schemes cannot continue indefinitely; the Government’s job in working out how to ease lockdown restrictions progressively, taper off relief schemes, and prevent a wave of further infections is certainly a tricky one to perform.

The Corporate Insolvency and Governance Bill, which is being fast-tracked on to the statute book, is one prong of the Government response to trying to keep as many businesses as possible afloat. The new insolvency and restructuring processes it contains, notably the restructuring tool and the freestanding moratorium, should help to expand the options available to directors and insolvency and restructuring professionals working to try and rescue businesses. Far less helpful is the Government plan to grant HMRC preferential status for some tax debts as of 1 December, which will make it far more difficult to obtain fresh funding for struggling companies, and which will reduce the returns to other creditors, including trading partners and suppliers, increasing the impact that the insolvency of a customer or supplier will have on them in turn.

Outlook mixed

There has been a lot of discussion in the media about whether the post-lockdown recovery will be V-shaped, U-shaped, L-shaped, or some other letter; it was recently suggested in the Financial Times that the recovery could be K-shaped, with a strong divergence between those companies in industries which had seen a boost due to the pandemic, such as the large tech companies, and those companies in industries whose underpinnings had been devastated by the effects of lockdown, such as non-essential bricks and mortar retailers. Individuals may also be swept up in this trend, with those able to work from home – largely concentrated in more middle-class occupations – able to carry on life more or less as usual, while frontline workers are either having to risk their health to continue working, or are at great risk of unemployment in sectors such as hospitality, tourism, or retail.

Again, partly thanks to the Government-backed furlough scheme for employees and support for the self-employed, the growth in unemployment – while still severe – is not as pronounced as it could have been. The ONS’s most recent labour market overview found that: “The UK employment rate in the three months to April 2020 was estimated at 76.4%, 0.3 percentage points higher than a year earlier but 0.1 percentage points down on the previous quarter”. There are fewer vacancies available, especially in the sectors hardest-hit by the lockdown and/or coronavirus-related disruption, but as lockdown gradually lifts, more job openings should appear. The question is whether those positions which are created will be enough to offset the large losses which could be on the horizon as the furlough scheme is tapered off, and companies adjust to the new and much-altered landscape.

With inflation well below the Bank of England’s 2% target – it was 0.5% in May, the lowest rate for four years – the financial shock caused by falling wages will be offset in the short term. The further question of what this will mean in the longer term is however still very much open – and underlines the importance of seeking advice from a trustworthy source if financial pressures are starting to build up.