Businesses across the UK have been negatively affected by the pandemic, but the damage has not been equal. Certain sectors and certain firms within them have suffered more than others – and many have faced highly uncertain futures.
The pandemic has affected all industries, but it has had a bigger impact on some firms and sectors than on others. The risks of infection from different activities, the ability of businesses to operate remotely and the policies to contain the spread of the virus have each played a role. These have all affected current business and expectations about the future.
What does evidence from economic research tell us?
Almost all businesses have been badly affected by the spread of Covid-19:
- Firms report that from April 2020 to March 2021, their sales were 21% lower and their investment was 26% lower (on average) than they would otherwise have been.
- Overall uncertainty rose sharply at the onset of the pandemic although it has started to fall back a bit in more recent months. On average over the past year, 70% of firms reported that the level of uncertainty facing their business was high or very high.
Some industries have been affected more than others:
- Industries that rely on personal interactions or travel have been hardest hit. This includes recreational services, such as gyms, and accommodation and food services (pubs, cafes and restaurants), where sales were more than 50% lower than normal in the past year due to Covid-19.
Why has the effect varied across industries? Lockdown rules and social distancing requirements have affected sales for some firms more than others (mostly negatively, but positively for some firms). There are large differences in the ability of workers to work from home, due both to the type of business and limitations on employees – for example, workers with children may struggle to work productively while also home schooling.
Disruptions to supply chains (the ability of firms to access the supplies that they require to conduct their business) will affect some businesses more than others. Recent events, including teething problems post-Brexit and the ‘traffic jam’ in the Suez Canal, have only exacerbated supply chain issues.
In addition, firms differ in their ability to withstand the disruption, due to available cash on hand, and in the decisions they take in the face of the considerable uncertainty about future business conditions.
What do firms themselves say the impact has been?
Many surveys ask firms how businesses have been affected by Covid-19, and how much they expect to be affected in the future. The main surveys in the UK are the Decision Maker Panel (DMP) and surveys conducted by business organisations such as the British Chambers of Commerce (BCC) and the Confederation of British Industry (CBI). In addition, in response to the crisis, the Office for National Statistics (ONS) launched the new Business Insights and Conditions Survey (BICS). These are a key source of information.
The DMP is a monthly survey of chief financial officers of small, medium and large firms in the UK. The companies surveyed operate in a broad range of industries and around 3,000 respond each month.
Relative to other business surveys, both the BICS and DMP surveys draw large samples designed to be representative of businesses registered in the UK. They provide timely, quantitative information that can be broken down to help get a better understanding of what lies behind the headline numbers. Where they cover the same issues, the BICS and DMP data tell a broadly similar story.
Sales declined dramatically, while employment fell by less
Figure 1 shows the estimated impact on sales and employment over the first year of the pandemic from the DMP survey. Firms in all sectors reported a large reduction in sales, which was close to 60% in recreational services. Other sectors reporting a large reduction were accommodation and food, administration and support, and transport and storage.
The smallest effects were expected in other production (agriculture, mining and quarrying, and utilities) and information and communications – all of which are less likely to be affected by lockdowns and other restrictions.
The expected reductions in employment were also large, but Figure 3 shows that they were smaller than the falls in sales, in large part due to government support programmes, such as the Coronavirus Job Retention Scheme (CJRS).
Figure 1: Expected impact of Covid-19 on sales and employment from 2020 Q2 to 2021 Q1 by industry
Note: Questions: ‘Relative to what would have otherwise happened, what is your best estimate for the impact of the spread of coronavirus (Covid-19) on the sales/employment of your business in each of the following periods: 2020 Q2, 2020 Q3, 2020 Q4, 2021 Q1?’ Estimates for 2020 Q2, Q3, Q4 and 2021 Q1 were based on the July 2020, October 2020, January 2021 and March 2021 DMP surveys respectively.
Figure 2 shows that the firms and industries that are expecting the largest negative impact on employment also have relatively lower productivity. Productivity, a measure of how much each worker in a firm or industry produces, can vary for many reasons, but tends to be lower in more labour-intensive industries such as accommodation and food, recreational services, and wholesale and retail.
Figure 2: Expected impact of Covid-19 on employment in 2021 Q2 and labour productivity
Note: Please see footnote for Figure 1 for details of questions. Labour productivity is calculated from last set of reported company accounts using data from Bureau Van Dijk. Labour productivity is valued added (operating profit plus remuneration) per employee. Here each dot represents 5% of firms grouped by labour productivity.
Businesses have laid off some workers and used the CJRS to furlough others. Firms in the DMP survey reported furloughing around a fifth of their employees over the past year on average; these workers were still employed but not required to work any hours.
The extent of furloughing has varied significantly across industries, as shown in Figure 3. How many employees a company chooses to furlough is linked to their expectations of the impact on sales and employment. Businesses in accommodation and food, and recreational services reported having furloughed the largest proportion of their workforce.
Figure 3: Impact of Covid-19 on employees
Note: question ‘Approximately what percentage of your employees fall into the following categories?’ Respondents could assign their employees to the following categories: (i) Still employed but not required to work any hours (e.g. ‘on furlough’), (ii) Unable to work (e.g. due to sickness, self-isolation, childcare etc.), (iii) Continuing to work on business premises’. Monthly survey data from April 2020 to March 2021 were averaged.
How has the crisis changed the way that businesses operate?
The spread of Covid-19 has had a profound impact on how businesses operate. For example, workers in some sectors have been able to adapt relatively easily to social distancing at work, for example, by working from home. The ability to do this has varied greatly by industry and firm. It depends on the nature of the firm’s activities and the extent to which it is necessary to engage in face-to-face contact with customers or other employees.
Figure 3 shows that working from home has been more prevalent in sectors such as finance, insurance, professional and scientific, and information and communications. These are all higher productivity service industries.
What about the impact of disruptions to supply chains?
Apart from falling demand, firms might also reduce output because they are unable to obtain crucial inputs or supplies. Around 40% of firms in the DMP survey reported some disruption to their supply chains during the second quarter of 2020.
Supply disruption was reported to be higher in industries and firms that expected larger sales impacts (Figure 4), implying that supply effects could have been a factor that held back output too, and more so in some sectors than others.
Figure 4: Disruption to non-labour inputs from Covid-19 in 2020 Q2 and expected impact of Covid-19 on sales in 2020 Q2 by industry
Note: Question ‘How has the spread of coronavirus (Covid-19) affected the availability of the non-labour inputs your business uses as of April, May and June 2020?’. See footnote to Figure 1.
The Covid-19 crisis has also led to a sharp increase in uncertainty for everyone – firms, workers and consumers. Overall uncertainty in the past year increased substantially, with 70% of businesses reporting that the overall level of uncertainty facing their business was high or very high. On average, 85% of firms reported that coronavirus was one of their top three sources of uncertainty over the year to March 2021.
Figure 5 shows that uncertainty around expected sales growth over the next year jumped in the second quarter of 2020. Since then it has remained elevated, although it has begun to fall back from its peak.
Figure 6 shows that this uncertainty was larger for firms in recreational services, accommodation and food, construction, and transport and storage – the sectors most affected by the pandemic. And while still high, there was a relatively smaller increase in uncertainty for firms in industries such as other services, health, other production (agriculture, mining and quarrying, and utilities).
Figure 5: Uncertainty around year-ahead sales growth
Note: Data are average standard deviations around expected year-ahead sales growth. This is derived from a question asking respondents to attach probabilities to five different possible outcomes for year-ahead sales growth. The five outcomes are chosen by the respondent.
Figure 6: Uncertainty around year-ahead sales growth by industry
Note: See footnote for Figure 4.
Overall, the sectors and businesses that have been most affected by lockdowns and other social restrictions have also suffered the most in terms of loss of sales and impacts on staff. It is also these industries, principally those related to food, travel and leisure, which have faced significant future uncertainty.
Where can I find out more?
- Decision Maker Panel: Monthly survey run by the Bank of England, Stanford University and the University of Nottingham providing insights into business expectations and uncertainty.
- Office for National Statistics Business Insights and Conditions Survey (BICS): ONS survey to gather real-time information on issues affecting business and the economy.
- The economic impact of coronavirus on UK businesses: Early evidence from the Decision Maker Panel: Report from Nicholas Bloom, Philip Bunn, Scarlet Chen, Paul Mizen and Pawel Smietanka on businesses’ expectations related to the impact of the pandemic on sales.
- How is Covid-19 affecting businesses in the UK? Swati Dhingra and Josh De Lyon draw on CBI data to examine how businesses fared when the lockdown came into force in April 2020.
- Getting people back into work: An Institute for Fiscal Studies (IFS) paper exploring policy considerations required to think about how best to get people back to work.
- The impact of COVID-19 on share prices in the UK: A briefing note from the IFS looking at the effect of the pandemic across industries using data on share prices.
- The economic effects of coronavirus in the UK: This Resolution Foundation report looks across a number of indicators to discuss the impact of Covid-19 on the UK economy, including trade, employment and financial wellbeing.
Who are the experts on this question?
- Nick Bloom, Stanford
- Swati Dhingra, LSE
- Peter Levell, IFS
- Jack Leslie, Resolution Foundation
- Paul Mizen, Nottingham