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The fallout of the COVID-19 crisis has seen troubling times for businesses small and large. Last week, Chancellor Rishi Sunak announced that the UK’s economy had slumped into recession after it shrunk by 20.4% between April and June.
The announcement has left many business owners, sole traders, and consumers alike concerned for how such an economic downfall could affect them. Here we take a look at what the UK’s recession is likely to mean for business, and the economy as a whole:
What causes a recession?
A recession is a decline in the economy that sees the Gross Domestic Product (GDP) of the affected country fall for two or more consecutive financial quarters. GDP is the market value of all goods and services produced within a country, and a fall in this value may happen for a number of reasons, including:
Reduced consumer spending
When a country is facing difficult times, as with the Coronavirus crisis, consumers may have less confidence in their personal finances and the wider economy. Fears such as job-cuts, inflation, and uncertain times for health/wellbeing may result in less spending by consumers within private sectors such as retail/hospitality. This leads to less income for businesses in these sectors, which ultimately sees a decline in their market value and financial situation.
Uncertain/wary times for business
Similar to the above, uncertain economic/social times may lower the confidence of businesses across the board. This may lead to a lack of expansion, job cuts, and ultimately less potential for growth within the private sector. This ultimately leads to a shrink in GDP over time, and can therefore lead to recession if a country faces trying times for a long enough period.
The recession as a result of COVID-19 is unprecedented; the national lockdown has led to turmoil for businesses small and large, particularly those in the hospitality and luxury retail sectors. In some cases, business has been at a complete standstill since restrictions were enforced in March, meaning the fall in market value and halt in spending was incredibly rapid.
What does it mean for my business?
When a country enters recession, the spending habits of consumers can change dramatically in a short space of time. Businesses providing luxury products and services usually see the first and sharpest decline in income, with financial anxiety meaning that consumers are likely to hold back on the big spends.
Loss of demand
Small businesses are likely to see the toughest of the recession’s effects, as they rely on regular cash flow to meet their own liabilities. As consumer demand slumps, and cash flow slows down, it causes a chain reaction in which some small businesses may be unable to pay suppliers/creditors. This, in turn, results in losses for all parties involved.
As revenue slumps for businesses, they often look to reduce staffing in order to save as much money as possible. While this may ease a company’s financial situation in the short-term, it may ultimately lead to further reduction in income due to overworked staff, demoralisation, and the need for larger businesses to close branches and thus reduce stock.
Recession affects businesses of all sizes, from self-employed sole traders to major corporations. It is likely that the effects of such economic decline will be felt across all sectors, particularly those viewed by consumers as ‘less essential’.
What does recession mean for consumers?
For consumers, recession creates a ripple effect through the economy which leads to difficulty with personal finances, redundancy anxiety, and an often forced change in spending habits. A few changes that may be felt by consumers include:
Fall in interest rates
Interest rates normally begin to fall towards the beginning of a recession. This has an effect on lenders, borrowers, and savers alike. It means a lower capital return on savings/investments, and also leads to uncertainty for those borrowing/lending money through the duration of the recession. Instability in adjustable interest rates on finance agreements can mean a reduction in borrowers, which further harms the economy through lack of stimulation.
When job cuts begin to strike through businesses large and small, it is often followed by a sense of redundancy anxiety within the workforce. If you are concerned that your job may be at risk, your spending habits are likely to change dramatically due to this uncertainty.
Slump in the job market
As cuts are made within businesses, it is unlikely that expansions to the workforce will be made as is usually expected. This means less availability of jobs across the market, which leads to trying times for those who are unemployed during the recession.
What help is available if I am facing financial difficulty?
If you find yourself facing financial difficulty, either as an individual or a limited company, there are several options available for you to seek assistance.
If your company is facing financial decline, and is struggling to make day-to-day payments, we can help. If your business model is viable, and your situation may be rectified, we may look to implement a Company Voluntary Arrangement (CVA) – a formal debt repayment plan that looks at the affordability of what you owe and protects your company from creditor action. If your company is insolvent, and is facing the reality of a point of no return, we may look to oversee a Creditors’ Voluntary Liquidation (CVL) in order to formally close your company’s doors before creditors look to force you into liquidation.
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For individuals facing difficulty with their personal finances, there are options available in order to settle your debts, and protect you from further creditor action. If you have a regular income, and are able to repay some of what you owe, an Individual Voluntary Arrangement (IVA) can be overseen by a licensed insolvency practice such as ourselves. An IVA is a formal repayment plan between yourself and your creditors which takes into account how much of your debt can be affordably repaid over a set period of time. If repayment of what you owe is out of the question, or your financial situation has declined dramatically, then we may look to pursue personal bankruptcy in order to protect you from further creditor pressure.
Read more on:Individual Voluntary Arrangement (IVA) Personal/sole trader debt
The UK’s recession in the fallout of the COVID-19 outbreak is the most dramatic on record, and brings with it uncertainty for businesses and individuals across all sectors and walks of life. The reduction of consumer spending, and total lack of business for hospitality/events sectors has seen the economy shrink by 20.4% between April and June.
How we can help
Whether you are concerned regarding the stability of your job, affordability of personal/company debts, or financial health of your business, we can help. As licenced insolvency professionals, we offer a wide range of services to both companies and individuals facing financial hardship. We offer a free consultation to discuss your position, and work out the best way forward given your circumstances. For more information, get in touch today.