An optimist’s view of the current economic situation - PKF Francis Clark
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An optimist’s view of the current economic situation

Steve Ashworth looks for reasons to be optimistic amid the economic turmoil caused by coronavirus.

There can be no doubt that the coronavirus pandemic is causing real hardship to many people, as well as the emotional impact on all those who have lost loved ones.

I’ve heard heartbreaking stories of people struggling to afford basic essentials, as the virus widens the gap between the haves and the have-nots.

I’m a natural optimist at heart, but with a core of pragmatism. You do have to look quite hard for reasons to be optimistic amid all that’s happening at the moment, but I believe there are some out there.

Of course, I’m not forgetting for one minute the human cost of what we’re living through – merely suggesting that, from an economic perspective, things may not be quite so bad as some would have us believe.

We have certainly seen some pretty tough economic data coming out in recent weeks, with UK GDP down by 5.8% in March – a record monthly fall. This fall was largely attributed to the lockdown measures causing a sharp decline in household spending, even though lockdown did not start until March 23. Among the very few industries to see growth were IT support and makers of pharmaceuticals, soaps and cleaning products.

The numbers prompted Chancellor Rishi Sunak to warn that: “It is now very likely that the UK economy will face a significant recession this year, and we’re already in the middle of that.”

The flow of money

It would be easy for the rest of us to panic. But reflecting on all this, I was reminded of Bill Phillips’s Economic Computer, which you can see at the Science Museum in London next time you’re allowed to visit. I’m not an economist, which is perhaps why this invention has stuck in my mind as a helpful way of thinking about the economy. Water flows around the machine to show how money flows around an economy – as you can see in this YouTube video – and this is the key thing we should bear in mind.

Much has been made of the eye-watering cost of the government’s response to coronavirus and how as taxpayers we are going to be paying it back for years, if not decades, to come. In effect, a giant public safety net has been stretched out across the financial system, which has seen a bout of intervention without precedent. The Office for Budget Responsibility has estimated the various policy interventions will push up government borrowing by £123.2 billion in the current financial year.

We have helped hundreds of clients to claim grants from the Coronavirus Job Retention Scheme

But don’t forget much of the government support is in the form of loan guarantees, such as the £9.56 billion of Coronavirus Business Interruption Loans and £23.78 billion of Bounce Back Loans approved so far. While it’s inevitable that some businesses will be unable to repay these loans, the cost to the taxpayer will only be as great as the headline figures if every borrower defaults.

More importantly, these support measures aren’t pouring money down the drain – they are putting much-needed cash into the accounts of businesses and households to help them get through this crisis.

They in turn will use it to buy goods – increasingly online – meaning the businesses which produce, sell and deliver those goods can pay their staff, and so the money continues to flow around the economy, with some of it coming back to the government through VAT and other taxes.

Safety net

As a firm, we have helped hundreds of clients to claim grants from the Coronavirus Job Retention Scheme to pay the wages of thousands of furloughed staff. Nationally, 8.9 million jobs have been furloughed, with £19.6 billion in wages claimed through the CJRS. A significant portion of the grants flowing to employers will flow back the other way as income tax and National Insurance contributions.

The main thing is, of course, that these 8.9 million people still have jobs which otherwise might have been lost. However, there will undoubtedly be delayed impacts as that safety net is gradually taken away. We have already seen universal credit applications hit a record monthly level in the early weeks of lockdown.

Thanks to the Job Retention Scheme, so far we have only seen the tip of the iceberg in terms of redundancies. When that cloak is lifted, there will be more bad news to come, but it will be much easier for businesses to reopen or increase production as demand picks up than if they had been forced to make redundancies when lockdown began.

Every industry faces one universal truth: life after the pandemic will look significantly different

Another reason to be optimistic is that all the money saved on petrol, lunches and holiday refunds will be available for spending later on, provided consumers have the confidence to spend instead of saving for a rainy day.

Clearly the force majeure that is Covid-19 has not impacted every industry equally, and some sectors and regions are more severely affected than others. Manufacturing areas have been hit harder by lockdown than, for example, London, with its high preponderance of office workers who have switched to home working.

Leisure and tourism businesses are clearly suffering due to the lockdown restrictions, leading to a disproportionate impact on the South West. But it’s reasonable to assume that when we are able to go on holiday again, people will be more inclined to take staycations instead of flying off to sunnier climes, helping those businesses to bounce back strongly when the time comes.

Strong spirits

If we think of the economy as a money-go-round, a crucial aspect of the current crisis is that, unlike during the credit crunch of 2008, the banking system has not seized up and there is still plenty of money flowing to businesses, some of it in the form of the aforementioned government-backed loans.

Most businesses will look different in some way after lockdown. For some, rebuilding their customer experience by appealing to changing values could result in a profitable, and perhaps much-needed revival. For other companies, there is no other choice but to play the waiting game. My concern would be that if they don’t look at their business plan and focus on recovery, it might be too late. Regardless, every industry faces one universal truth: life after the pandemic will look significantly different.

Perhaps a lesson to learn and think about is how we might do things differently, whether in work or consumer spending or relationships with each other within our new communities – turning disruption into opportunity.

During this crisis, we have seen strong spirits, enormous courage and a backbone of fundraising, community spirit and national support. As we look to the future, that same level of passion and commitment now needs to be brought to bear in supporting our economy and helping business rebuild and get back on track. From the conversations I’ve had with clients and business organisations, I’m optimistic that this can happen.

For more information on the range of support schemes, visit our Coronavirus Updates hub.

FEATURING: Steve Ashworth
Before joining the Bristol office of PKF Francis Clark in July 2019, Steve started his career at HMRC over 30 years ago and then spent… read more
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