Economic and business impacts of COVID-19: the biggest shake-up in modern times
Diseases have ravaged the world for as long as there has been life on earth, but none have caused as much disruption in modern times as COVID-19. In March 2020, 21,000 more businesses collapsed compared to the same month a year earlier – an increase of 70% – and the number of new businesses dropped by almost a quarter. We can’t forget the potential impact Brexit may have had (being hit by the pandemic just two months later makes it difficult to assess the true effect) but the financial strains caused by imposed restrictions are likely to be the biggest contributing factor to business closure.
But it hasn’t all been gloomy; some businesses have thrived during the last two years. In this post we examine the effect COVID-19 has had on the UK economy and the performance of various industries.
The UK economy in the wake of COVID-19
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In 2020, gross domestic product (GDP – a measure of the market value of all goods and services produced which generally shows how well the economy is doing) dropped 9.7% in 2020 – the sharpest fall since official records began. The slump was biggest at the start of the pandemic, with GDP in April 2020 25% lower compared to February, and eased as lockdown restrictions were gradually lifted. The second and third lockdowns both saw economic decline, but not to the extent of the first (Figure 1).
The April dip was caused largely by public health measures introduced to contain the virus. Production was slowed by employee isolation and social-distancing restrictions in workplaces. Demand was curtailed by shop closures and reduced disposable income available to those on furlough. This created a spiral effect – less personal income meant lower spending, which resulted in decreased demand and less production, resulting in lower earnings…. and so forth.
Compared to the 2008 regression, when economic recovery from a 6% drop took five years, the recent revival has been quick – by November 2021, GDP had returned to pre-pandemic levels.
Figure 1: Monthly UK GDP Jan 2019 – Dec 2021
Total retail sales in 2020 dropped by 1.9%, but there was large variability between subsectors (Figure 2). Non-essential shops were forced to close on 23 March 2020 and businesses reliant on high street footfall had to adapt quickly to boost online sales (which rose to a record 33.9% of all retail sales during the pandemic) or risk going out of business.
E-commerce was already expanding before the pandemic hit; large numbers of retailers recognised the potential for generating revenue online and smartphone ownership made this channel more accessible to customers. In 2020, this growth was accelerated further through necessity; between March and June online trading was the only option for many retailers. Online shopping, home deliveries and click-and-collect services boomed. IBM’s US Retail Index estimates the pandemic has advanced digital shopping by approximately five years.
Food vendors were one of the lucky few to see higher sales at the beginning of lockdown. In March 2020, many food retailers experienced a growth in sales corresponding to the period of panic-buying. Sales remained steady over 2020, never dropping below pre-pandemic levels (Figure 2).
Clothing sales have really suffered over the last two years; staying at home meant an almost complete abolition of social events, leaving new clothes redundant. Even by December 2020, clothing sales had not recovered to its pre-pandemic baseline. For Arcadia – the well-known group containing Topshop, Burton and Dorothy Perkins – reduced demand caused by COVID-19 and a mediocre online presence pushed them over the brink into administration.
Unnecessary travel was prohibited for much of lockdown and fuel sales reflect the lack of vehicles on the roads. Workforces were home-based, eliminating daily commutes. During the peak of the first lockdown oil demand reduced by over 10 million barrels per day. By April 2020, oil prices dropped to their lowest ever, reaching negative $40 per barrel.
Supply disruptions also plagued the industry due to truck driver shortages at the end of 2021; this caused chaos and panic buying, with petrol pumps across the country running dry.
The oil industry was already in difficulty before the COVID-19 pandemic: struggling with excessive supply and price drops followed by a huge slump in demand during the global crisis. Returns have been poor, and the rising importance placed on ESG (environmental, social and governance) issues means the industry is being forced to change or risk failure.
The increase in online shopping has meant more delivery vehicles on the roads (also in the air and over sea) – requiring fuel – and lots of plastic packaging – which is manufactured using oil.
By 2021 prices had recovered but demand remained lower than before lockdown.
The fuel industry has seen turbulence in recent years; this doesn’t look set to ease any time soon.
Figure 2: Value of UK retail sales across different sectors. Feb 2020 = 100.
Travel restrictions led to a 60% reduction in revenue in 2020 compared to 2019. McKinsey predict that recovery to pre-pandemic levels will not be achieved until 2024, with business travel likely to take even longer.
In the years preceding the pandemic, many expected growth in the travel industry and the manufacture of aircraft increased accordingly to meet the anticipated demand. But this wasn’t the case; many leased aircrafts were returned, the costs of leasing dropped significantly, and the surplus of vehicles means new aircrafts can potentially be bought for lower prices.
The surge in online retail sales resulted in cargo flight income comprising a greater proportion of airline revenue while passenger flights remained grounded. Cargo transport turned out to be critical for the aviation industry, and this could be the case for several years as business and leisure passenger flight numbers recover.
Technology has been key to adapting to the new demands caused by COVID-19; digital change has advanced ahead of its time in response to the pandemic. Businesses were forced to change the way they operated by adapting to a remote workforce and reduced physical customer presence in stores. Companies who successfully modified their business strategies have integrated technology into their operations, and many companies recognise the need for additional investment in technology going forward. Cloud computing systems to allow access to information regardless of location, improving apps and websites to facilitate online sales and investing in video call technology to promote employee communication are three examples of changes made.
Supply problems have also plagued the tech industry, with the shortage of semiconductor chips being an example picked up by the media. Manufacture of these chips in China was delayed by the original COVID-19 outbreak, resulting in a worldwide shortage (many struggled to get hold of the new Xbox this Christmas).
Zoom – a videoconferencing technology – flourished during lockdown. It’s share price soared throughout 2020, until November when the roll-out of the COVID-19 vaccine was announced. Since then, it has gradually decreased from $500 USD on 9 November 2020 to $149.6 USD 9 February 2022).
Overall, hospitality has suffered since March 2020. Large group meetings were prohibited by government restrictions and in-person socialising halted for a lot of the year. Bars and restaurants fared badly, save for the boost caused by the Eat Out to Help Out scheme in August 2020. Those who could adapt to takeaway services salvaged some revenue.
Campsites are one of the few hospitality subsectors that did reasonably well, driven by a rise in staycations in line with government advice and challenging overseas travel logistics (last minute cancellations and complex testing schedules).
Figure 3: Revenue patterns in accommodation and food and beverage sub-sectors Jan 19 – May 21
What this means for small businesses
Small businesses are likely to benefit by investing in cloud systems and improving their IT infrastructure to support remote working and improve online presence. The use of technology to engage customers, such as using an app and loyalty schemes, could help customer retention.
For businesses that ship overseas, outward transports costs could reduce as air cargo space is more readily available. However, the environmental impact of shipping using this route could be a reason to look for alternatives.
Further fuel shortages are possible in the future. Inward and outward transport processes may need review given the effect disruptions could have on inventory. The cost of transport may also increase in line with higher fuel prices.
Measures taken to boost the UK economy
Interest rates are lower during times of economic difficulty to encourage consumers to borrow and spend money (injecting money back into the economy), rather than save up. The government can also help by increasing investment into businesses through grants and loans (several loans were available during the pandemic including the Bounce Back Loan and Coronavirus Business Interruption Loan Scheme) and more spending on UK products and services.
The structure of work has changed in many industries, and employee (re)training could be key to keeping pace and boosting productivity.
Looking to the future
The effects of COVID-19 are likely to be with us for some time; adaptation is going to be key to success in an everchanging business environment. Technology infrastructure is likely to continue advancing to support those businesses with remote workforces (which is unlikely to revert to pre-pandemic patterns).
The last two years have been disastrous for many businesses forced to close under the strain, but it has opened the playing field to some extent, providing space for new start-ups. In 1918 the Spanish Flu resulted in closure of many businesses in the USA and Europe due to illness, but the number of start-ups in 1919 was vast. We may see small UK businesses flourish in the years to come.
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