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Tue, 24 May 2022 23:08:00

Risk of Business Failure - POID Tracker - Stalled COVID Recovery

by Peter John Lambert, Apolline Marion and John Van Reenen

Summary

We continue tracking the proportion of UK businesses at-risk of permanently closing, using ONS BICS survey data
The proportion of firms at-risk of closure dropped substantially over the 15 month period - from 15% in January 2021 to 5.7% in April 2022
This recovery stalled following the winding up of the furlough scheme at the end of September 2021
Recent global events appear to be increasing business risk, especially amongst SMEs
We show these data closely track GDP growth, redundancies, and COVID-related uncertainty

Latest Findings

The share of businesses who are at risk of failure has fallen to 5.7% in April, according to the Business Impact of COVID-19 Survey (BICS) run by the Office of National Statistics (ONS). This is substantially lower than the peak of 15% at the beginning of 2021. The drop was primarily due to improvements in the outlook of firms with fewer than 50 employees.

To study business risk, we focus on the BICS question generally collected every two weeks which asks: “How much confidence does your business have that it will survive the next three months?” We classify the proportion of businesses who respond with “low” or “no” chance of survival as being at-risk of closing permanently.

Figure 1 shows how the proportion of at-risk businesses has evolved since the beginning of the survey in October 2020. The share of at-risk firms peaked in January 2021, which coincided with a large unanticipated lockdown. Since this peak, there has been a steady decline. This recovery began to stall after the end of the furlough scheme and around the time the Omicron variant arrived.

Figure 1: Percentage of Businesses At Risk of Exit Over Next 3 Months

Note: Data comes from the Business Impact of COVID-19 Survey (BICS). Our measure of “At-Risk” firms is defined as those businesses answering that they had “Low” or “No Confidence” to the question “How much confidence does your business have that it will survive the next three months?” The BICS survey samples roughly 10,000 businesses every two weeks. We take the closing date of the survey sample window as the date. This question was included in the survey from Wave 14 (21st September 2020 – 4th October 2020) to the most recent Wave 53 (21st March 2022 – 4th April 2022), excluding Wave 15, 34, 36, 38, 40, 42, 44, 46, 50 and 52, where this question was not asked. The responses are weighted by firm size to make the responses representative. This weighting is done based on the firm employment size distribution from the Inter-Departmental Business Register (IDBR) - which is also the sampling frame for the BICS. Key dates come from a variety of sources, listed at the end of this piece.

Share of At-Risk SMEs on the rise

The latest findings show that 5.7% (1-in-17) firms are at risk of failure. While overall trends have remained well below the 2020 levels, recent increases in the proportion of at-risk are of concern. This increase is especially worrying for small firms with fewer than 50 employees.

Figure 2 below shows that since the share of at-risk firms in the 0-9 employee and 10-49 employee category has risen sharply during Q4 2021 and Q1 2022. This is likely to be driven by the end of the furlough scheme (30th September, 2021) as well as Omicron (December, 2021) and rising energy prices.

Figure 2: Share of At-Risk Firms, broken down by firm size

Note: See notes to Figure 1. The responses within each size band are weighted to make the responses representative, based on the Inter-Departmental Business Register (IDBR).

Previous Findings

The survey question we study has been asked since mid-September 2020, with the first results published in October 2020. We began reporting on these data in January 2021. We also documented the beginning of this recovery back in August 2021, just before the end of the furlough scheme in the UK. The recovery was associated with three key developments: (i) The easing of lockdown restrictions; (ii) Vaccine rollout and (iii) the decline in COVID deaths.

As Covid recedes, new challenges such as the Ukraine crisis has arisen. We next compare the POID Business Risk tracker data with other important macroeconomic series.

Comparison of our measure to other macro series

We focus on three key areas of the recovery: (1) GDP growth, (2) redundancies, and (3) economic uncertainty.

(1) GDP Growth

Figure 3 shows the co-movement of at-risk businesses and GDP. The dashed green line, with index on the right-hand-side shows GDP changes (relative to 2019 levels). The peak of at-risk firms we saw in early 2021 aligns with the largest GDP losses of 8.5%. As the share of firms at-risk began to fall, GDP began to recover, returning to 2019 levels of output by October 2021.

Figure 3: At-Risk Firms vs GDP Growth

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. The GDP percent change relative to Index Year 2019 is calculated as the monthly GDP Index minus 100 and divided by 100. Data is sourced from here (accessed on 30/03/2022).

(2) Redundancies

Figure 4 shows that the number of redundancies (rolling three-month average of redundancies per 1,000 workers) has also fallen dramatically, in line with our series. From a peak of 14.2 for the period ending in November, we are down to historic lows of near 3.

Figure 4: At-Risk Firms vs Redundancies (per 1000 Workers)

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. We use the three-months rolling UK redundancy rate, per 1,000 workers, people aged 16 years and over, not seasonally adjusted, between October 2020 and January 2022. The redundancy rate is the ratio of the redundancy level to the number of employees in the previous quarter, multiplied by 1,000. Data is sourced from the ONS and can be accessed at this link. We take the end date of the period window as the date (e.g. for period window August 2021 to October 2021, we use 1st October 2021 as our date).

(3) Economic Uncertainty

Figure 5 shows a series of COVID-19 related uncertainty, extracted from the Decision Makers Panel (DMP). We focus on the question: “How important is the spread of coronavirus (COVID-19) as a source of uncertainty for your business?” The dashed purple line in Figure 5 tracks the share of those respondents who answered “Largest source” to this question. Again, these series exhibit strong correlation, and both show the transitory upward shock during the Omicron wave.

Figure 5: At-Risk Firms and COVID-19 Uncertainty

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. The “COVID-19 Uncertainty” represents the percentage of respondents who answered “Largest source” to the following question: "How important is the spread of coronavirus (Covid-19) as a source of uncertainty for your business?" through the Bank of England’s Decision Maker Panel (DMP) Survey. It is a monthly survey of around 3,000 Chief Financial Officers of small, medium and large firms in the UK, operating in a broad range of industries. Data have been weighted by industry and firm size to be representative of the population of UK businesses with at least 10 employees. Data was accessed on 7/04/2022 at this link https://decisionmakerpanel.co.uk/data/

Conclusion

In early 2021, 15% of firms thought they were at risk of going under, but by October this had dropped by two-thirds. This recovery stalled after the end of the furlough scheme and the Omicron wave over the winter, so that in April 2022 around 5% of firms remain at risk.

The increase in at-risk firms with fewer than 50 employees is especially concerning, as these are businesses most vulnerable to cost rises from tightening Brexit controls, the Ukraine crisis and other supply chain disruptions.

We also continue to monitor the impacts of the £79.31 billion in business debt issued during COVID. This money was a lifeline for business during the crises, but may also depress hiring and investment as firms prioritise repayment over growth.

References:
Timing of lockdowns and policy announcements gathered from various web sources including:

Changes to Government’s Business Support Schemes primarily from:

About the authors

Peter John Lambert is completing his PhD in economics at LSE, funded by the 2018 Commonwealth Scholarship Award. He also works in the Centre for Economic Performance - Growth Research Programme - as well as for the Programme on Innovation and Diffusion (POID).

Apolline Marion has completed her MSc in Economics at the LSE, and currently works as a researcher for the Programme on Innovation and Diffusion (POID) and the Centre for Economic Performance (CEP).

John Van Reenen is the Ronald Coase School Professor at LSE and the Gordon Y. Billiard Professor of Management and Economics at the Massachusetts Institute of Technology, where he is jointly appointed in the department of economics and the MIT Sloan School of Management. He is also an associate in the Growth Research Programme at the Centre for Economic Performance (CEP). He was appointed an Officer of the Order of the British Empire (OBE) and received the Yrjö Jahnsson Award.

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Sun, 15 Aug 2021 08:04:00

Risk of Business Failure - POID Tracker

by Peter Lambert, Apolline Marion and John Van Reenen

Summary

We continue tracking the proportion of UK businesses at-risk of permanently closing, using ONS survey data (BICS).
The latest data are very encouraging, as the number of at-risk firms has more than halved in the last six months. Only 6.3 per cent (1-in-16) of all registered businesses say they are at-risk – the lowest since the survey began in September 2020
The rise in confidence has paralleled an easing of restrictions, rising vaccination rates, and reduced COVID deaths
The end of the furlough scheme by October 1st 2021 may add further instability, though utilisation of the scheme has fallen sharply
The delay of the full opening up and emergence of new Delta variant caused a temporary spike in expected failure, which is a reminder of the fragility of the recovery

Latest Findings

During the past six months, we have seen a significant improvement in business confidence across the UK in the Business Impact of COVID-19 Survey (BICS) run by the Office of National Statistics (ONS). The number of businesses that reported being at risk of failure in July 2021 was fewer than half of those in January 2021. The drop was primarily due to improvements in the outlook of smaller enterprises (those with fewer than 50 employees). The improvement is a cause for cautious optimism, although we also see that businesses are still susceptible to possible disruptions due to new variants or snap-policy changes.

To study business confidence, we focus on the question in the BICS that is collected roughly every two weeks. It asks: “How much confidence does your business have that it will survive the next three months?” We classify the proportion of businesses who respond with “low” or “no” chance of survival as being at-risk of closing permanently.

Figure 1 shows how the proportion of at-risk businesses has evolved since the beginning of the BICS survey. The peak in the proportion of firms at risk came from data collected from late December to early January 2021. This peak coincided with a largely unanticipated lockdown imposed weeks before Christmas 2020. Since this peak, there has been a steady decline in the expected exit rate.

Figure 1: Percentage of Businesses At Risk of Exit Over Next 3 Months

Note: Data comes from the Business Impact of COVID-19 Survey (BICS). Our measure of “At-Risk” firms is defined as those businesses answering that they had “Low” or “No Confidence” to the question “How much confidence does your business have that it will survive the next three months?” The BICS survey samples roughly 10,000 businesses every two weeks. We take the closing date of the survey sample window as the date. This question was included in the survey from Wave 14 (21st September 2020 – 4th October 2020) to the most recent Wave 35 (22nd March 2021 – 29th July 2021), excluding Wave 15, 34 and 35, where this question was not asked. The responses are weighted by firm size to make the responses representative. This weighting is done based on the firm employment size distribution from the Inter-Departmental Business Register (IDBR) - which is also the sampling frame for the BICS. Key dates come from a variety of sources, listed at the end of this piece.

Previous Findings

The survey question we study has been asked since mid-October 2020, with the first results published in September 2020. We began reporting on these data in January 2021.

At that time, things looked very bleak: more than 15 per cent (1-in-7) of businesses were on the brink of exit, covering more than 2.5 million jobs.

Our follow-up piece in April 2021 showed a mild improvement when nearly 12 per cent (1-in-8) firms (or 1.9 million jobs) were at risk of being destroyed due to COVID.

Cause for Optimism

The latest findings show that 6.3 per cent (1-in-16) firms are at risk of failure, covering just over 1 million jobs¹. This is the lowest level since the beginning of the BICS survey, which began collecting data in September 2020.

Figure 2 below shows that the most significant improvement in confidence came from micro-enterprises (0-9 employees) and small enterprises (10-49 employees). These were also the most severely hit groups earlier in the pandemic, so it is encouraging that they have responded strongest to the improved business landscape.

Figure 2: Proportion of Business At Risk of Exit by Firm Size Group

Note: See Figure 1 note. The responses within each size band are weighted to make the responses representative, based on the Inter-Departmental Business Register (IDBR).

What led to the improvement in expected survival?

We cannot know for sure what caused the improvement in confidence. Still, we focus on three possible causes: the easing of lockdown restrictions, the significant uptake of vaccinations, and the (related) reduction in deaths from COVID.

Easing of Restrictions

Unlike the many snap-changes to policy in 2020 (most notably the strict and sudden imposing of local lockdowns just before Christmas), 2021 has been more stable with a gradual easing of restrictions implemented.

The Government’s “roadmap” released in late February 2021 planned for a stepped decline in the stringency of measures imposed on businesses and households.

Moreover, this forward guidance of the easing of restrictions was mostly rolled out as planned.

Figure 3 below shows how the subsequent transitions from the beginning of a third national lockdown on 6 January through to so-called “Freedom Day” on 19 July, parallel the decline in the number of “at-risk” businesses.

Figure 3: Easing of Restrictions

Note: See Figure 5 note for discussion of the number of “at-risk” businesses. The timing of restrictions data was sourced from various online sources.

Vaccine Roll-Out

The second notable trend that coincides with the decline in business’ self-reported risk of failure is the uptake of COVID vaccines in the UK.

Figure 4 below shows how the proportion of vaccinated people grew strongly (first and second doses) during the period when businesses at risk of exit fell steadily.

Figure 4: Vaccine Roll-Out

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. The vaccination rate refers to the proportion of vaccinated UK citizens aged 18 or above. Single-dose vaccines were counted as both first and second dose for consistency. Data sourced from https://coronavirus.data.gov.uk/details/vaccinations (accessed 1st August 2021).

Reduced COVID Deaths

Finally, we show how the reduced number of COVID-related deaths tracks the improvement in business confidence. Thus, the reduction in fatalities was both a consequence and a cause of reduced policy stringency and correlated with vaccine uptake.

Figure 5: Declining COVID Deaths

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. The number of new deaths was compiled on 04/08/2021, sourced from https://coronavirus.data.gov.uk/details/deaths. This includes deaths up to 28 days after a new infection is recorded.

Are we out of the woods?

Still Quite Volatile

The significant decline in business vulnerability is very welcome news. But these data also show that when changes to COVID policies are made abruptly, or threats arise such as new variants, things can quickly reverse.

For example, Figure 1 shows an uptick in self-reported risk of failure during May and June. This coincided with the increasing concerns about the Delta variant as well as the announced delays in so-called “Freedom Day”.

End of the ‘Furlough’ Scheme

Looking forward, the tapering down of Government support for furloughed workers and subsidised loan schemes may give rise to additional volatility in the number of firms at-risk of failure.

Figure 6 shows the recent history of policy changes, extensions, and current plans to end worker support entirely by 1st October, 2021.

Figure 6: Changes to Government Support for Furloughed Workers

Note: See Figure 5 note for discussion of the number of “at-risk” businesses. The green lines represent changes (announced or actual) to the Coronavirus Jobs Retention Scheme (CJRS) (aka the “furlough” scheme). The Scheme began on 20th March, 2020 and was originally scheduled to wind up on 31 October 2020, before the second wave of COVID began. The scheme is currently scheduled to end on 30 September, 2021. Government has already begun tapering off support: Prior to July 1st, the CJRS covered the full salary of a furloughed worker (who receives 80 percent of their pre-pandemic salary). From July 1st, the Government reduced its contribution to 70 percent (making businesses liable for the remaining 10%). This fell again on 1st August, down 60 percent.

The latest official numbers from HMRC showed that 1.9 million jobs remained on full or partial furlough at the end of June 2021.

Even more recent survey data suggests a 31% decline in the number of furloughed workers since these HMRC numbers were released².

While the end of the furlough scheme will have an impact on employment and business closures , this is likely to slow rather than reverse the recovery in business confidence.

Conclusion

The removal of Government support, possible new variants, and the ever-present risk of localised spikes in infections could make the rest of 2021 a quite volatile period. Nonetheless, the UK is in a much stronger place both economically and epidemiologically today than just six months earlier.

Footnotes:

The number of jobs covered by this fraction of firms is based on the latest Business Population Estimates (BPE), from January 2020. For an outline of the methodology applied, see Appendix A in our earlier report.
The ONS BICS survey data asks businesses “In the last two weeks, roughly what proportion of your enterprise's workforce were partially or fully furloughed?” Responses collected up to 27th June (Wave 34) reported that 5.4% of workers were furloughed. Responses collected 25 July 2021 (wave 36) reported that 3.7% of workers were furloughed. The percentage change in these numbers is how we calculate that the number of furloughed workers has fallen by 31% in July.

References:

Timing of lockdowns and policy announcements gathered from various web sources including:

Changes to Government’s Business Support Schemes primarily from:

About the authors

Peter Lambert is completing his PhD in economics at LSE, funded by the 2018 Commonwealth Scholarship Award. He also works in the Centre for Economic Performance - Growth Research Programme - as well as for the Programme on Innovation and Diffusion (POID).

Apolline Marion has completed her MSc in Economics at the LSE, and currently works as a researcher for the Programme on Innovation and Diffusion (POID) and the Centre for Economic Performance (CEP).

John Van Reenen is the Ronald Coase School Professor at LSE and the Gordon Y. Billiard Professor of Management and Economics at the Massachusetts Institute of Technology, where he is jointly appointed in the department of economics and the MIT Sloan School of Management. He is also an associate in the Growth Research Programme at the Centre for Economic Performance (CEP). He was appointed an Officer of the Order of the British Empire (OBE) and received the Yrjö Jahnsson Award.

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Tue, 27 Apr 2021 09:30:00

Risk of Business Failure: POID Tracker

by Peter Lambert and John Van Reenen

Summary

We use ONS data to track how UK businesses view their risks of bankruptcy over the next three months
The recent data suggest one-in-eight British businesses - covering 1.9 million jobs (in the registered and unregistered sectors) - are at risk of failure by July 2021
One-third fewer businesses report having “low” or “no” chance of survival today (mid-April 2021), compared to the January 2021 peak
The extensions to COVID business support schemes have helped avert a wave of bankruptcies, but risks remain

Latest Findings

To look at business perceptions of survival, we use survey data collected by the Office of National Statistics (ONS). We focus on the question in the Business Impact of COVID-19 Survey (BICS), which is collected roughly every two weeks. It asks: “How much confidence does your business have that it will survive the next three months?” We classify the proportion of businesses who respond with “low” or “no” chance of survival as being at-risk of closing down permanently.

The survey question has been asked since mid-October 2020 and Figure 1 shows that between 10% and 15% of businesses see themselves at risk of failure over the next three months. The numbers jumped up to 15% at the height of the second wave from mid-December to mid- January, but have been in decline since then.

Figure 1: Percentage of Businesses At-Risk of Exit

Note: Data comes from the Business Impact of COVID-19 Survey (BICS). Our measure of “At-Risk” firms is defined as those businesses answering that they had “Low” or “No Confidence” to the question “How much confidence does your business have that it will survive the next three months?” The BICS survey samples roughly 10,000 businesses every two weeks. We take the closing date of the survey sample window as the date. This question was included in the survey from Wave collected responses to this question from Wave 14 (21st Sept 2020 – 4th Oct 2020) to the most recent Wave 27 (22nd March 2021 – 4th Apr 2021) (excluding Wave 15). The responses are weighted to make the responses representative (based on the Inter-Departmental Business Register, the sampling frame for the BICS).

While this downward trend since January is encouraging¹, recent data (Wave 27 of BICS) suggests 315,000 registered businesses are at-risk of exit by July 2021². This represents around 1-in-8 UK firms. If we extrapolate out these data to cover all businesses (both registered and unregistered) then over 740,000 businesses are at risk. Should all these businesses exit, roughly 1.9 million jobs would be lost. The knock-on effects of this would be severe in terms of financial and macroeconomic stability.

Figure 2 shows how the risk of failure breaks down depending on the size of the firm. Unsurprisingly, the smaller the firm the greater the risk of failure. Indeed, the recent improvement in survival chances is led by firms with under 50 employees (particularly in the 10-50 size range).

Figure 2: Percentage of Businesses At-Risk of Exit, broken down by firm size

Note: Data comes from the Business Impact of COVID-19 Survey (BICS). Our measure of “At-Risk” firms is defined as those businesses answering that they had “Low” or “No Confidence” to the question “How much confidence does your business have that it will survive the next three months?” The BICS survey samples roughly 10,000 businesses every two weeks. We take the closing date of the survey sample window as the date. This question was included in the survey from Wave collected responses to this question from Wave 14 (21st Sept 2020 – 4th Oct 2020) to the recent Wave 27 (22nd March 2021 – 4th Apr 2021) (excluding Wave 15). The responses both within each firm size band, are weighted to make the responses representative, based on the Inter-Departmental Business Register (IDBR).

Changes since our last report

In January 2021, together with the Alliance for Full Employment, we published a report on the extent of the crisis facing UK businesses due to the COVID-19 pandemic. Based on the latest data available at the time, we reported that 1-in-7 businesses had low prospects of surviving to April (covering 2.5 million workers in registered and unregistered businesses) at which time many of the policy support schemes were set to end. Two scenarios were possible: Extend policy support well into 2021 or else risk a huge wave of bankruptcies. Fortunately, the second path was taken. In the lead up to the March 2021 budget, the UK Government announced that the policies keeping business afloat would be extended.

The furlough scheme—which was originally to end in April 2021—was extended through to September 2021 (with co-contributions by employers commencing in July). The payment of VAT balances can now be spread over eleven interest free instalments culminating in Feb 2022. Various publicly backed loan schemes were also bolstered and extended.

The extensions were welcome although waiting until weeks before the cliff-edge was too late for many businesses and the uncertainty is likely to have chilled investment and hiring. It is still too early to tell whether a wave of businesses did indeed exit already. Even in normal times, business deaths (i.e. permanent closures) do not show up in the data until around three months after the event.

What lesson can we learn?

While the vast vaccine rollout and diminished COVID case numbers are cause for optimism, and the extensions to various policy lifelines supporting UK businesses seems to have reduced the number of businesses currently at-risk of bankruptcy, we are far from out of the woods.

Should further measures be needed to avoid a large wave of bankruptcies, the government ought be prepared to announce these well in advance of any policy cliff-edges to reduce uncertainty as much as is feasible.

Footnotes:

While it is possible the numbers improved precisely because of a large wave of bankruptcies, through a sample selection effect, on balance we see the fall in at-risk businesses as a positive outcome.
This figure is derived based on the most recent Business Population Estimates (BPE), from January 2020. For an outline of the methodology applied, see Appendix A in our earlier report.

About the authors

Peter Lambert is completing his PhD in economics at LSE, funded by the 2018 Commonwealth Scholarship Award. He also works in the Centre for Economic Performance - Growth Research Programme - as an occasional research assistant for Professor John Van Reenen.

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Mon, 01 Feb 2021 21:04:00

Welcome to The Programme on Innovation and Diffusion (POID) blog

The Programme on Innovation and Diffusion (POID) carries out cutting-edge research into how to boost productivity through nurturing innovation – ideas that are new to the world – and how to diffuse these ideas across the economy. The £5 million programme will be led by Professor John Van Reenen, OBE, the Ronald Coase Chair in Economics at LSE and former director of the Centre for Economic Performance. Professor Van Reenen is renowned for his research on productivity, which looks into the causes and consequences of innovation for economic life, both in terms of 'soft' innovation such as changes in management practices and 'hard' technologies such as information technology and artificial intelligence. The programme is funded jointly by the Economic and Social Research Council and the London School of Economics and Political Science

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