Reasons for (cautious) optimism
It has been a hectic first quarter for business leaders. Firms kicked off the new year with a Brexit deal to wrangle their heads around and the next iteration of covid-19 lockdowns. Adjusting supply chains and adapting to new customs procedures, with your main and closest trading partner, is testing at the best of times, let alone during a pandemic. Almost 20% of IoD members had halted trading with the European Union as a result. Meanwhile though businesses have been showing more resilience with each and every lockdown, the economy is still expected to be 10% below pre-pandemic levels before the Easter break.
But the first quarter has not been without positive news either. The successful vaccine rollout and the Government’s roadmap to reopen the economy all suggest the UK is on course for a rapid bounce back in activity in the coming quarters as restrictions wind down. While Brexit uncertainty has not evaporated, with key elements of the deal still to be negotiated, the ‘deal or no deal’ drag that hindered business plans for much of the past few years has at least lifted. With more support, businesses will also gradually adjust to new non-tariff barriers with the EU over the year. Members should certainly explore the SME Brexit Support Fund, which the IoD has long lobbied for, to get the professional advice they need.
The Budget also held a number of positives for directors. Firstly, the dreaded spring cliff-edge in economic support was avoided. The Chancellor extended the furlough scheme, self-employed income support, business rates relief, the lower VAT rate for certain sectors, and developed a new Recovery Loan Scheme, as a predecessor to the Bounce Back Loan and Coronavirus Business Interruption Loan schemes. Secondly, the package also included a number of sweeteners to boost investment, including £5,000 digital vouchers, as part of the Help to Grow scheme, and a new 130% Super-deduction capital allowance. Of course, the downside was the announcement that Corporation Tax would be hiked to 25% from 2023/4, though many smaller firms would be able to avoid it.
With the fiscal forecasts tied to the Office for Budget Responsibility’s assumption that the pandemic would cause the UK economy to scar by 3%, there is every chance that a better and faster than expected recovery could put the Chancellor in a better position by the time he intends to raise Corporation Taxes. If firms invest rapidly in the coming years, and if workers are able to retrain and upskill, the permanent damage from the pandemic could be unwound, and the Treasury’s position on tax hikes could soften. The risk, as always, remains around covid-19; the efficacy of vaccines and the emergence of new strains.
Nonetheless, the upshot of developments this quarter is that there is an emerging window of opportunity for business leaders to shore-up their recovery. Many organisations will be positioning themselves to efficiently scale-up over the next 6-12 months, ensuring they are competitive to gain market share in a rebounding economy. Growth could hit 4% in 2021 and reach around 7% in 2022 on the back of pent-up consumer spending and corporate investment. The economy should also be on its way upward as the key extensions to covid-19 economic support expire after the summer, so ‘cliff-edges’ in policy support going forward should feel more like an off-ramp. Much of this will involve businesses tapping into initiatives in the Budget to support investment in their digital capabilities, capital, machinery, and skills, and, those in the position to do so, will be taking advantage of record low interest rates.
There is light at the end of the tunnel. Indeed, if all goes to plan, the first quarter should mark the low point for businesses this year—it is now time to be looking onwards and upwards.
Tej Parikh, Chief Economist
Tej holds a Bachelor's degree in Economics from University College London, and a Master's degree in International and Development Economics from Yale University.
Prior to joining the IoD, he worked as an economic analyst at the Bank of England in roles across monetary and financial policy. Subsequently, he moved to Cambodia where he was a journalist focusing on economic and private sector development for a national newspaper. He has since been a freelance political risk consultant and journalist, covering Europe and Asia in particular.
He has published for numerous international media outlets including Foreign Affairs, the Guardian, and The Diplomat, and is currently an active member of London's Great Debaters Club.