A crisis like no other

Date: 19/05/2020
Author: Subrahmaniam Krishnan-Harihara
Company: Greater Manchester Chamber of Commerce

Subrahmaniam Krishnan-Harihara, Head of Research at Greater Manchester Chamber of Commerce, looks at the current economic situation.

When we entered 2020, there was a sense of cautious relief. There was a majority government in place, which provided some clarity on Brexit. The UK entered the transition phase on 31st January and business leaders were keeping a close watch on the trade negotiations. At the Chamber, we were preparing our 2020 Campaign for Business document, welcoming the good news about HS2 and gauging business views on city region’s bus franchising plans. From afar in China, news was emerging about a health emergency but barring appreciation for the speed with which China built some new hospitals, coronavirus was certainly not on the agenda in the UK. 
Come March, coronavirus had made its way to Europe. The Chancellor delivered his maiden budget speech, which included some measures to end austerity and support businesses from the potential fallout of the coronavirus COVID-19 crisis. As infection rates increased exponentially and reports of the health systems in countries like Italy starting to become overwhelmed, the public health response to COVID-19 took priority. The UK wide lockdown saw non-essential shops temporarily closed, the majority of the UK’s workforce on homeworking and large parts of the economy at standstill. As the consequences of the pandemic started to manifest themselves, the Government announced a support package of £330 billion to shield businesses and workers from financial catastrophe. And as the temperamental British weather took a turn for the better, the sun shone but just not enough to warm the economy, which is now in deep freeze.  
This was a fast-moving picture with profound impact on the national, regional and local economy. To understand the economic downturn and how businesses are responding to the crisis, the Chamber launched the weekly Business Monitor as an ongoing COVID-19 tracker. Fieldwork for the seventh iteration of the tracker is now underway and we have now gathered the views of nearly 600 Greater Manchester based businesses. They all have two major concerns: 

  • Customer demand has plummeted to a historic low
  • The majority of businesses face precarious cash flow positions  

As a result of these two concerns, there has been a sharp decrease in business confidence. Understandably, the default position adopted by some commentators is to compare this downturn with the Great Recession of 2008/09 - in any economic downturn, demand goes down followed by business confidence. Soon many businesses are hit by liquidity concerns. The COVID-19 pandemic has, however, affected businesses and the global economy in some unique ways so much so that questions have been raised about the future of a ‘globalised’ world and increasing international trade. In my view, there are three things that make the current economic emergency a crisis like no other.  

1. The problem and the solution both contributed to decreasing economic activity. As soon as parts of China went into lockdown, global supply chains were disrupted causing problems for businesses in the UK. Later, the medical risks forced people to shun shopping malls, restaurants, sporting events etc. and led to a sharp reduction in demand. At the moment, most advanced and emerging nations are in some form of lockdown, leading to a huge increase in unemployment (36 million in the US alone), triggering a further collapse in consumer confidence. 
2. Supply side constrains are real and will dampen economic recovery. With COVID-19 being a public health emergency, safeguarding lives required most direct customer facing businesses in all countries affected by
the virus to be shut down, reducing local and national economies to a state of “medically induced coma” (1). Even during a planned relaxation of the lockdown, hospitality and leisure businesses may not all be able to immediately open. Other sectors, which can reopen, will have to do so under strict safety requirements. Thus, the response measures implemented put serious limitations on the supply side of the economy and could, in the long term, engender a reconfiguration towards new business models.
3. The uncertainty may not be short-lived. One of the key concerns in the current situation and the critical factor affecting consumer confidence is overcoming the fear of infection. That fear will be definitively overcome only when a vaccine is developed and rolled out to large sections of society. Current indications are that a proven vaccine is several months away. As the lockdown is relaxed and sectors which are currently shuttered open, some people will indeed return. Many may yet stay away. This could cause prolonged uncertainty about a pick-up in demand to pre-pandemic levels.   
The above factors have rendered it nearly impossible to stimulate demand in the short-term and influenced a different set of response measures – most governments, including in the UK, are trying to cushion the impact of the downturn and shield businesses and workers from financial catastrophe. Data gathered via the Chamber’s Business Monitor shows that the absolute majority of businesses in Greater Manchester are now reliant on one or more of the UK government’s support schemes. Nearly two-thirds of businesses have put staff on furlough and businesses in the worst affected sectors are also dependant on one-off grants. There are some valid questions about how businesses will be impacted when support is reduced or withdrawn, and the Chamber will lobby Government for ensuring that there is continued support to those businesses that need it the most. After all, a crisis like no other requires a response like no other. 

(1) https://www.businessinsider.com/paul-krugman-us-economy-coma-coronavirus-more-fiscal-aid-2020-3?r=US&IR=T