What will a recovery look like for UK Plc?

A summary of our latest webinar by James Ashton, a leading financial journalist

by James Ashton

Guests on Quantuma’s latest ‘Building financial fortitude’ webinar recently discussed prospects for the UK economy in 2021 revealing that it will be the best-prepared companies that would thrive as the impact of the coronavirus (COVID-19) pandemic persists.
“My general view is always to be an optimist on the economy and a pessimist on politics,” said Jimmy McLoughlin, a former Downing Street business adviser to both Boris Johnson and Theresa May. “The British economy has gone through a huge amount of change over the last few decades, and it has always bounced back and found a way. We are at a stage where undoubtedly the state is going to get bigger over the next few years, as we look to pay for what the government has funded.”
Boris Johnson, McLoughlin said, was very committed to his “levelling up” agenda designed to boost the English regions as a key plank of remaining in power for a decade. Tax rises would have to come, but: “I think it's quite difficult to bring big tax rises in by April next year, just when the economy might be beginning to recover”.
GDP has bounced off the bottom but hopes of a V-shaped recovery has proved to be too optimistic. The UK economy is around 10% smaller than it was pre-pandemic, and although government support has been fulsome it leaves a series of cliff edges to be navigated as employers are weaned off the furlough scheme, business rates holiday and the moratorium on landlords evicting tenants.
Louise Durkan, the head of Quantuma’s financial advisory team, thought the government had tried to cover all the bases with its financial support but that there would inevitably be winners and losers from the pandemic – and some would be created by the tiered approach to restrictions particularly in the restaurant and hospitality trade.
“I don't think we're really going to see the level of inequality until those things have been removed,” she said. “What we really haven't got a clear picture of is the extent to which everybody has been reliant upon that support purely to survive.”
Simon Bonney, one of Quantuma’s managing directors and a restructuring expert, has watched companies continue to accrue debt as hopes of a return to normality in early autumn were dashed and a second lockdown was imposed. “What they are not having to face is the reality of what might happen later down the line,” he said. “There is a question of how much debt can realistically be written off.”
He pointed out the plight of commercial landlords who have been left powerless to pursue their debts. Unless the government can resolve this situation satisfactorily it risks creating a new generation of “zombie” companies, Bonney added.” “Landlords have obligations themselves as companies, whether they have private or public shareholders. There's a terrifically difficult car crash coming in that regard.”
Some businesses are already shifting how they operate to reflect the new reality with examples like coffee chain Caffè Nero aiming to move some landlords to a turnover-based rent arrangement over time.
Durkan said that was an increasing trend and several businesses were in a position where they had no alternative. However, it was not necessarily an easy shift to make. “I think there's going to be some administrative challenges. Just getting the numbers right – answering the question ‘what is your turnover for that particular store?’ is not simple or straightforward,” she added.
All agreed that significant corporate restructurings lay ahead – but they could lead to a brighter 2021. “Restructuring does bring recovery and rescue,” Durkan said. “Some entrepreneurs aren't necessarily going to be setting up brand new businesses. They may be looking at other businesses where perhaps the model hasn't worked and they haven't survived.”
How business revives will vary by sector. Aviation and tourism will come back slowly because it depends on broad economic confidence. Bonney said: “Clearly a lot of people are desperate to get out of their homes and see some sun but these are big purchases for the vast majority of people.”
And tension remains between the nation’s health and its wealth. Conversely, there will be a lot of people hoping that restaurants and bars don't have a good Christmas because there will be a fear that that leads to a third lockdown, added Bonney.
The precise direction of the economy next year is unclear, McLoughlin admitted, likening the latest FTSE 100 share price chart to a square root symbol. “It's dropped and then come back quite a lot. But then it's a bit unsure - there's almost a squiggle. And I think that kind of sums up where we are.”
Watch the recording here:


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