Can the economy survive a second lockdown?

    4 November 2020

    There is only so much a business can take. Find yourself forced to close your doors for a week or two and – if you have been managing your business well – you should be able live off your cash reserves. Cut costs and you should be able to eke the cash out for rather longer. But ultimately, no business can survive if it is unable to trade – unless, that is, it is not really a business at all but a hobby/charity funded by a benefactor.

    That is why the second lockdown is likely to be far more deadly than the first. Businesses which managed to cling on during the spring will have emerged from lockdown in a weaker position than they went in. Sooner or later, if lockdowns continue, we will reach a tipping point at which businesses will start going down like ninepins.

    Yet here’s the paradox. While high-profile failures like Jaeger might lead you to think otherwise, so far in 2020 company failures have been running markedly lower than they did in 2019. Between March and September 2019, 10,177 businesses went belly-up. In the same period in 2020 only 6850 did so. In every month, insolvencies have been running lower than in the corresponding month last year. Look at these figures – from the Insolvency Service – alone and you would think that 2020 was boom time. How on Earth is that consistent with an economy which shrank by 20 per cent in the second quarter and is still nearly 10 per cent smaller than it was at the beginning of the year?

    What the insolvency figures show is the sheer power of the government’s bailouts: in the form of emergency loans, grants and the furlough scheme. It might also be a reflection of a more patient attitude being shown by banks. Put together,  these measures have not just saved many businesses which have been temporarily undermined by Covid 19 and lockdown – they have postponed the failure of businesses which are not really viable and which would have gone bust this year had it not been the government putting its arms around the economy.

    Some may see this as a triumph, but there is something really rather worrying about it. A business which was unviable before Covid 19 is unlikely suddenly to have become viable as a result of it – unless, perhaps, it is involved in a niche area like making facemasks or cleaning commercial premises. Far more businesses will have become even more unviable during the economic slump. Inevitably, there must be a huge backlog of businesses waiting to go bust as soon as support is withdrawn. And that, for political reasons, is likely to be a drawn-out affair. In the meantime, bad businesses are going to be acting as a great weight dragging down productivity.

    The legacy of Covid 19 is almost inevitably going to be a gross misallocation of resources in activities which add little to national wealth and which deprive good businesses of the talent they need to grow.  How many times have we heard the phrase ‘build back better’ over the past few months? Yet, unless government swiftly dismantles its bailout programmes as soon as we get back to any kind of normality – and is prepared to suffer the consequent rush of bankruptcies and job losses – we are going to end up building back very much worse.

    Covid, or more particularly the bailouts which have come with it, is in danger of taking us back to the 1970s, with the state propping up zombie businesses for fear of boosting short-term unemployment figures.