Fears government can't stop 'meteor hitting planet business'
Fears are growing about the future of the UK economy, as experts warn that the government’s “unprecedented” package of support many not be enough to prevent a steep recession.
Bank of America on Thursday sharply downgraded its forecast for the UK economy this year, cutting its estimate of GDP growth from -2% to -7.4% in 2020.
It came as the Federation of Small Businesses and the Corporate Finance Network this week warned that millions of firms could collapse in weeks without a cash infusion.
The UK government has announced billions of pounds of support for businesses hit by the coronavirus pandemic, in the form of state-backed loans, tax relief, subsidies for employee wages, and grants. Rules around insolvency have also been relaxed.
However, almost a million people have already applied for unemployment benefits in just the last two weeks despite the support package.
Bank of America said: “UK stimulus measures [are] less effective than we assumed, with sizeable delays to funds flowing meaning a large shock develops.”
Duncan Swift, head of insolvency trade body R3, told Yahoo Finance UK: “The seismic shock caused by this event has basically removed cash from the system.
“If you’re in a position where you’re in the say hotel, leisure, pub, club trade, your revenue sources have completely gone to zero pretty much overnight, yet you’ve got bills to pay.”
The government’s hoped to address the cash crunch through its coronavirus business interruption loans scheme, which underwrites loans of up to £5m for small businesses. However, firms have reported difficulties getting the cash from banks.
The economic damage is being multiplied by the wide-ranging impact of the COVID-19 pandemic, which has reduced activity across almost all industries. Swift likened the impact to a “meteorite hitting planet business”.
Chancellor Rishi Sunak late on Thursday announced changes to the Treasury’s cornerstone loan guarantee scheme within days to get cash to businesses quicker.
But a bigger problem may be trying to convince business owners to take the loans in the first place.
“Nearly everything that directors are doing at the moment — and that government are telling them to do — is to take on additional credit and that is a very risky measure,” Ian Robert, an insolvency partner at Moore Kingston Smith, told Yahoo Finance UK.
“I, for one, wouldn’t want to advise many directors to kick the can down the road, take on all this debt and give personal guarantees as well, which is what most of the banks are asking directors to do.”
The Chancellor said a fortnight ago he would do “whatever it takes” to support the economy through the coronavirus crisis, suggesting further measures could be announced in the coming days and weeks.
Ultimately, however, the fast-moving nature of the COVID-19 pandemic raises the concern that whatever the state does may ultimately be too slow.
“Whilst the policy responses are positive in terms of their intent, the detail causes delay,” Swift said. “The risk is, doesn’t matter how big it is, if it isn’t delivered when it’s needed businesses are going to implode.”
Bank of America forecasts UK unemployment to peak at 6.9% this year, up from 3.9% at the start of the year. That estimate — which would equate to around 1m extra job seekers — already looks conservative.
“With such a fast moving crisis, everybody is playing catchup,” Swift said. “We are into wholly uncharted territory.”
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