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Sun, 15 Aug 2021 08:04:00
Risk of Business Failure - POID Tracker
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
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.
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:
- https://www.instituteforgovernment.org.uk/sites/default/files/timeline-lockdown-web.pdf
- https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#V
- https://globalvatonline.pwc.com/covid-19-summary
- https://www.gov.uk/government/news/confirmed-cases-of-covid-19-variants-identified-in-uk
- https://www.gov.uk/government/publications/covid-19-variants-genomically-confirmed-case-numbers/variants-distribution-of-case-data-11-june-2021
- https://www.gov.uk/government/publications/covid-19-response-spring-2021/covid-19-response-spring-2021-summary
- https://www.standard.co.uk/news/uk/lockdown-england-coronavirus-restrictions-schools-shops-b34707.html
- https://www.bbc.com/news/uk-55554550
- https://coronavirus.data.gov.uk/details/vaccinations
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.
Tue, 27 Apr 2021 09:30:00
Risk of Business Failure: POID Tracker
- 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.
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.
Mon, 01 Feb 2021 21:04:00