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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:

  1. 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.
  2. 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.



Full post

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

at-risk-proportion

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 

 

at-risk-proportion-by-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:

  1. 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.
  2. 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.

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.

Full post

Mon, 15 Feb 2021 10:47:00

The impact of regulation on innovation


In our first POID Working Paper Philippe Aghion, Antonin Bergeaud and John Van Reenen examine the pace and nature of innovation:



Does regulation affect the pace and nature of innovation and if so, by how much? We build a tractable and quantifiable endogenous growth model with size-contingent regulations. We apply this to population administrative firm panel data from France, where many labor regulations apply to firms with 50 or more employees. Nonparametrically, we find that there is a sharp fall in the fraction of innovating firms just to the left of the regulatory threshold. Further, a dynamic analysis shows a sharp reduction in the firm's innovation response to exogenous demand shocks for firms just below the regulatory threshold. We then quantitatively fit the parameters of the model to the data, finding that innovation at the macro level is about 5.4% lower due to the regulation, a 2.2% consumption equivalent welfare loss. Four-fifths of this loss is due to lower innovation intensity per firm rather than just a misallocation towards smaller firms and lower entry. We generalize the theory to allow for changes in the direction of R&D, and find that regulation's negative effects only matter for incremental innovation (as measured by citations and text-based measures of novelty). A more regulated economy may have less innovation, but when firms do innovate they tend to "swing for the fence" with more radical (and labor saving) breakthroughs.


Poid Working Paper No. 1 was published on 29 January 2021, under the Programme on Innovation and Diffusion, and CEP Growth programme. 


Download PDF - The impact of regulation on innovation



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Mon, 15 Feb 2021 10:05:00

A major wave of UK business closures by April 2021? The scale of the problem and what can be done


In this CEP Covid-19 Analyses, Peter Lambert and John Van Reenen present an analysis of the financial health of UK businesses.

The report shows that immediate action is needed to prevent a wave of corporate failure in early April.
The authors urge for action: Now is also the moment to consider how we rebuild our economy and society as the welcome vaccination programme rolls out.



This CEP Covid-19 analysis was published 27 January 2021 under the Programme on Innovation and Diffusion, CEP Growth programme, and the Alliance for Full Employment (AFFE).




Full post

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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