You couldn’t accuse the UK government of wishing a second national lockdown. In fact, according to critics, the Johnson-led administration is guilty of trying to fend off the inevitable for too long, failing to take the decisive action that just might have nipped the ‘second wave’ in the bud back in September when it was clear cases were rising again.
The government’s reasoning is no secret. It wanted to do everything it possibly could to keep the already battered economy open, fearing the long-term consequences of another significant shut down in trade and commerce.
And yet here we are. After it became clear last week that the regional approach to COVID-19 restrictions wasn’t going to be enough, that transmission had galloped past the worst-case working assumptions, and that the NHS was already close to being overwhelmed in some areas, No 10 felt it had no other choice. Another U-turn, another lockdown, another month (we hope) of all but essential customer-facing businesses being shut.
You don’t have to look far to understand what the government is so worried about in imposing a second national lockdown. The latest economic impact of coronavirus report released by the Office of National Statistics (ONS) contains some alarming figures – half (49%) of UK businesses have low or moderate confidence in surviving the next three months. Just under half of businesses (45%) report that they are running on less than six months’ cash reserves, while a quarter (24%) have less than three months’ to draw on.
Cash flow crisis
The cash flow crisis facing UK businesses is on the verge of reaching critical proportions. In August, the Bank of England forecast that the total deficit would amount to around £200bn this financial year. A quarter of that was made up of debt from companies “that were highly leveraged, had a low credit rating or were unprofitable before the Covid-19 shock” – in other words, businesses that were already in poor financial health before the pandemic hit.
Whether or not a second lockdown will push such businesses over the edge and trigger a flood of insolvencies is, of course, hard to predict with any certainty. Given the range of protection measures that have now been extended, including the furlough scheme, if the restrictions do only last the intended four weeks, many businesses may just fight to live another day.
But the threat of mass failures is all too real. All eyes will of course be on the hospitality and retail industries, which are hardest hit by enforced lockdown closures. 17% of accommodation and food companies were already rated as being at ‘severe risk’ of insolvency by the ONS before the latest restrictions were announced. Given the wider impact on supply chains, any company insolvency has, the ripples of businesses collapsing will be felt much further than the retail and hospitality sectors.
There is also concern that the stark reality of how many businesses are no longer solvent is being kicked down the road. Official Q3 2020 figures show a quarter-on-quarter and year-on-year fall in the number of companies being declared insolvent. However, the Insolvency Service acknowledges that this is probably due to government measures imposed to restrict the use of statutory demands and winding-up petitions by creditors during the pandemic, as well as reduced HMRC enforcement activity and lower volumes of court hearings.
While all of these factors might help to keep businesses afloat in the short term, at some point there has to be a reckoning – not least because creditors who can’t claw back overdue debts run the risk of failing, too. The question now is what the government does about the growing number of businesses that are running on empty and would probably fail if current support measures are withdrawn.
Let that happen to too many businesses at once, and the results could be catastrophic.