B2B Economic Outlook - UK - March 2021
Overview
 
“The tentative dates set by the government to reopen the economy over the coming months provide hope that businesses are over the worst that the pandemic has brought them financially. However, it will still take time for things to return to pre-pandemic levels with businesses likely to still need support and guidance on how to best recover from the severe shock. Navigating through the post-Brexit environment will also present its own challenges, particularly for exporters.”
-Lewis Cone, Senior B2B Analyst

What you need to know
Economic overview
In 2020, annual GDP growth was recorded at -9.9% - the steepest decline in annual growth on record.

At its latest MPC meeting on 3 February 2021, the Committee judged that the existing stance of monetary policy remains appropriate and voted unanimously to maintain the Bank Rate at 0.1%.

The Committee also voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20bn.

In January 2021, the CPI rose by 0.7% in the 12 months to January – up from 0.6% to December 2020. Meanwhile, on a monthly basis, CPI fell by 0.2% in January 2021 following a 0.3% rise in December 2020.

However, the rate was still higher than the almost five-year low that was recorded in August 2020 (0.2%) which was partly driven by the government’s ‘Eat Out to Help Out’ scheme which reduced prices for dining out at restaurants and cafes.

In February 2021, the ONS reported that real average total pay earnings had grown by 4.7% in the three months to December 2020. In real terms, total pay is now growing at a faster rate than inflation, at positive 3.8%, and regular pay growth in real terms is also positive, at 3.3%.

Business health
According to Mintel’s Small Business Banking incl. impact of COVID-19 – UK, November 2020 Report, 23% of small businesses categorise their financial situation as ‘tight’, while 11% believe their financial situation is ‘struggling/in trouble’. Meanwhile, only 18% said that their situation was ‘healthy’ – almost half the number reported in 2019.

Despite the uncertainty heading into 2020 with businesses unavailable to fully commit to long-term strategies due to the unknowns surrounding Brexit, turnover rose by 4.7% between the start of 2019 and the start of 2020.

However, such growth is unlikely to have occurred through the rest of 2020 due to the onset of the COVID-19 pandemic and the subsequent nationwide lockdowns and economic shutdowns in some sectors that have occurred since.

As of 8-21 February 2021 the ONS’ Business Impact of Coronavirus (COVID-19) Survey found that 46% of businesses reported their turnover had decreased below what is normally expected for this time of the year, compared with 38% that had experienced no impact on turnover.

Despite this, there were a total of 12,557 underlying company insolvencies in 2020, a 27% decrease on 2019. This decrease was a result of lower numbers of insolvencies across all main insolvency procedures.

The overall reduction in company insolvencies since the start of lockdown in March 2020 has likely been driven by the range of government measures put in place to financially support companies in response to the coronavirus pandemic, including the Corporate Insolvency and Governance Act (CIGA).

Special focus: B2B finance
The most recent data for January 2021 showed that gross lending to non-financial businesses was £17.4bn, excluding overdrafts. Within this total, gross lending to large businesses was £12.7bn, while gross lending to SMEs was £4.7bn.

Moreover, net lending to large businesses turned negative for the seventh month since the first COVID-19 lockdown in March 2020 with net lending at -£2.9bn in January 2020. However, net lending to SMEs remained positive at £112m.

The Bank of England’s latest Credit Conditions Survey suggests that the overall availability of credit to the corporate sector was unchanged in Q4 2020, with overall availability expected to remain unchanged in Q1 2021.

The Bank of England’s data shows that demand for commercial finance from both medium and large-sized firms has remained largely negative since Q4 2015, reflecting low business confidence.

Lenders reported a decrease in demand for corporate lending for small and medium-sized businesses, but a rise in demand from large PNFCs in Q4 2020. Lenders expected demand for corporate lending to decline for small businesses but rise for medium and large business in Q1 2021.

In 2020, loan write-offs totalled £878m – 39% lower than in 2019.

What’s next?
Several independent forecasters have stated that the UK’s GDP will rebound after Q1 2021 with the accelerated vaccine roll-out expected to lead to an easing of COVID-related restrictions and a general easing of people’s health concerns.

The BoE has estimated that the economy will grow by 5% in 2021 (albeit down from its November 2020 estimate of 7.25%), 7.25% in 2022 (up from 6.25%), and 1.25% in 2023 (down from 1.75%).

The Bank of England still expects that unemployment will peak at 7.75% later this year and that GDP will return to pre-COVID levels early in 2022.

The central bank held out the prospect of imposing negative interest rates if the post-lockdown upswing disappoints and said it would force commercial banks to prepare for negative rates to be imposed in six months. It stressed that this was not a sign that the bank’s Monetary Policy Committee thought such a move was necessary.

On Brexit, BoE officials continue to predict that the friction caused by leaving the EU will drag on the economy, with GDP set to be 3.25% lower over the long run than it would have been, due to lower trade with the bloc.

According to the latest ICAEW Business Confidence Monitor™ (BCM), business confidence rose to +10 in Q1 2021 – its highest level since Q1 2016.

The positive sentiment is shared by different types of companies across sectors and almost all regions, and by businesses that export as well as those that do not.

The Transport & Storage and Construction sectors are the most optimistic that business conditions in the next 12 months will be better than in the 12 months just gone. The Construction sector expects the strongest growth in sales, closely followed by Retail & Wholesale and Transport & Storage. The sector with the weakest confidence is Property.

The only region where business confidence is in negative territory is Yorkshire & Humber, although the decline is very marginal. This follows the region recording a steeper fall in exports than anywhere else in the UK.

Confidence is also subdued among companies in Northern England and Wales. It is notable that the three most pessimistic regions in the UK are also the three that are most reliant on the EU market for exporting their goods.

At the other end of the spectrum, companies in the South East are the most confident across the UK about prospects for the next 12 months. The region has seen small but significant resilience over the past year. It is the only one not to report a contraction in domestic sales over the past 12 months, probably reflecting its strength in electronics and the digital economy.

Weaning business and their employees off loans and grants is vital for the UK’s long-term economic recovery and in paying off the COVID-19 induced debt levels.

This responsibility does not rest solely on the government, but it must create the platform for private investment to help begin the recovery. Tax-advantaged investing could have a vital role to play, by incentivising the private sector to back its own growth.

Brexit also provides an opportunity to access wider global markets, to grow exports and help the UK’s balance of payments.

The government must also ensure it strikes a fair deal for the financial services industry, which was largely absent from the initial trade agreement with the EU in December 2020, and provide greater clarity on equivalence and the framework for regulatory cooperation.