Consumers will Drive the UK’s Economic Recovery

Leading economists have advised that consumers are the key to GDP growth and prosperity as the UK begins to recover from the pandemic. With the trading of most retail stores prohibited during the lockdowns, shockwaves rippled along and outwards from the supply chain. A House of Commons Briefing Paper from January 2021 estimates 99% of all private sector businesses are SMEs (0-250 employees) which provide over 50% of UK employment and turnover. It is these very businesses that are at the forefront of economic growth.

A study by Paragon Bank has found 31% of SMEs have returned to pre-covid levels of revenue, and 22% of SMEs have seen revenue exceed pre-pandemic levels. The study also identified that 92% of business owners are feeling positive about the future, with 1 in 4 expecting turnover to exceed pre-pandemic levels. However, 16% of SMEs asked by Paragon Bank said their recovery was uncertain.  A study by the ACCA found most businesses expect to return or exceed pre-pandemic levels within the next 2 years but warn two-thirds of SME’s are struggling to obtain financing in order to grow their business. The lack of access to overdrafts or loans is said to be affecting 1 in 3 businesses. Analysis by The Organisation for Economic Co-operation and Development shows 45% of SMEs in the UK have been unable to access government support, compared with 66.4% of SMEs in the wider OECD comprising of 37 other countries.

Hospitality with a Ping

The so-called ‘pingdemic’ is providing another challenge for SMEs to overcome, with staff shortages seen all the way from agriculture to warehousing. The hospitality sector has been particularly affected because 43% of the workforce are aged 18-25 and most were only eligible for the vaccine from mid-June. The Chief Executive of the British Beer & Pub Association, Emma McClarkin has told the BBC “Already pubs are closing or greatly reducing their opening hours due to staff shortages caused by app pings – despite staff testing negative on lateral flow tests”. With the Furlough scheme winding down, unvaccinated hospitality workers are missing out on much needed hours and tips due to being pinged and having to immediately self-isolate. Some restaurants have closed mid-service due to staff being pinged whilst on shift, leaving unfulfilled customers and fresh produce going to waste. In a world where online reviews can make or break a pub, bar or restaurant there is concern by business owners that service issues caused by the pingdemic could be misconstrued.

Outdoor events such as weddings and festivals could lose thousands in revenue at the behest of a ping. Even with the NHS Covid App being tweaked, the 8-12 week gap required between first and second vaccinations for the 18-25 demographic means there is no instant solution.

Staycation Staff Shortages

With the ongoing uncertainty over international travel, the UK has seen a boom in ‘staycations’. However, the tourism industry is competing against less seasonal sectors to recruit enough employees. Cornwall, known in particular for local produce and stunning beaches, is facing one of its busiest summers in living memory. The Cornwall Association of Tourist Attractions has warned the lack of candidates to fill vacant positions is causing a crisis in some areas. Signing on bonuses and generous salaries have are being made available in some areas but it is not an instant solution. Some attractions are running at 60-70% staff headcount for visitor numbers that would normally see them taking on extra staff.

Retail Parks & Shopping Centres Anchoring Down

National retail chain ScS (Sofa Carpet Specialist) issued a strong update ahead of YE 2021 accounts which are due to be published later this year. Despite all 100 stores being closed for 17 weeks during the trading period, orders were only down 6.5% compared to the last unaffected year of trading in 2019. Whilst 2021 figures have been impacted significantly by lockdowns, the last 7 weeks of the July financial year saw orders up by 23.7%. Pent up demand following lockdowns and the ability to fulfil the orders has been a key factor in ScS weathering difficult trading conditions. Footasylum has also reported positive news in challenging times with a £348,000 profit in the 12 months to 30 January 2021. The pandemic forced temporary store closures which saw revenue decrease by 6.7% but their online shop enjoyed double-digit growth with Footasylum returning to profit for the year. ScS stores are predominantly based in retail parks and Footasylum’s in shopping centres. They act as anchor tenants attracting footfall which also benefits neighbouring businesses and supply chains.

Retail parks & shopping centres are not immune to the litter of empty shops seen in town & city high streets. There remains difficulty in finding new tenants who can make bricks and mortar stores viable. Much like the high street, the challenge to entice consumers and regenerate supply chains is more vital now than it ever has been.

The Only Way is Up?

During the pandemic, the government took a variety of measures to support businesses. These included amongst other measures, Coronavirus Job Retention Scheme, 12-month business rates holiday, and Coronavirus Business Interruption Loan Scheme. As a direct consequence, UK government debt has now topped £2.2tn which is costing £47bn a year in interest.

What is Inflation? The amount by which goods increase in price over a given period of time. As items cost more, they become less financially accessible which reduces demand. Likewise, as prices reduce, goods become more accessible and demand increases.

The Bank of England has warned that inflation could hit 4% this year if interest rates remain unchanged at the historical low of 0.1% Inflation in June 2021 reached 2.5% which is already above the Bank’s goal of 2%. Higher energy prices and domestic goods prices are seen to be driving the current inflation. The energy price cap is being raised by Ofgem in view of wholesale prices increasing by an eyewatering 50% since February. The cost of domestic goods is increasing due to a variety of factors including labour shortage, component shortages, and supply bottlenecks.

The Bank for International Settlements has warned interest rates could increase to those last seen in the 1990s of 5-7%. That would cost the UK Government more than £100bn per year in interest to service the current £2.2tn debt. The BIS also suggested policymakers should initially maintain low-interest rates in the early phase of post-pandemic recovery. In its latest report, the BIS emphasises “the uneven recovery creates daunting challenges for policymakers”.

As industries try to recover from the pandemic, some sectors are seeing demand and prices rise at an alarming rate. Data from Nationwide Building Society shows house prices are increasing at their fastest rate in 17 years. In May 2021 the average house price was 13.4% more than 12 months ago. With inflation potentially at 4% this year, the Office for National Statistics estimates wage growth (excluding bonuses) to be between 3.2% and 4.4% as of May 2021. To stem inflation, a rise in interest rates could make existing mortgage payments unaffordable.

In the backdrop of inflation and SMEs trying to recover from the worst of the pandemic, the Bank of England still expects the economy to grow by 7.25% in 2021 and a further 6% in 2022. Despite market uncertainty and justified pessimism, the evidence very much suggests the UK economy is now poised to rise out of the pandemic. There is cause for optimism that SMEs are voicing, but a note of caution given we cannot predict how or if the virus will have another unprecedented impact on the UK and global stage.