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A Gathering Storm? Covid-19 and Bad Debt

14 December 2020

What does it feel like to be in the eye of a storm? 

The eye of a storm is deceivably calm and serene – but for those caught up in a hurricane it is one of the most dangerous places to be. Surrounded towering thunderstorms, the eye is just a fleeting glimpse of normality before extreme weather begins again.

Right now, the UK could be in the eye of the Covid-19 pandemic financial storm. 

The storm began in March 2020 as stock markets plunged due to the Covid19 pandemic. Since that day, the virus has claimed over 1.6 million lives in every corner of the globe, including 65,000 people in the UK. 

Whilst the government has stepped in to support the economy, the total cost of Covid19 support is now forecast to exceed £280bn – approximately 14% of total GDP.

Yet despite this, the news headlines are changing as we enter the festive period with the promise of approved vaccines and a stock market recovery. 

Here are four key warning signs that suggest the storm has not yet passed:

1) Commercial Debt Has Grown Despite Government Support

Businesses have written off close £1.86bn of unpaid debt this year, which is a +1% increase on 2019.

While this increase might seem small, it happens against a backdrop of loans, grants and salary support – all of which is set to end in March 2021 as the government seeks to rebuild its own balance sheet.

“Government Covid-19 support is shifting from grants and loans” said Mark Halstead of insolvency firm Red Flag Alert, so “written off debt will grow significantly and repeatedly in the next 12 months"

Most commentators agree that government intervention has been a success. However, despite struggling businesses being given breathing space and financial support, it looks like there has still been an increase in bad debt which will impact cash flowing throughout supply chains.

As insolvencies vary significantly in value, the ripple-effect for larger businesses with complex supply chains can prove especially damaging, as a single business failure can suck much needed revenue out of supply chains.

2) Pressure on Retail, Hospitality & Leisure

Approximately 6.5 million people work in the retail and hospitality industry which continues to face sector specific pressure due to national and local lockdown restrictions. 

Like all recessions, the Covid19 pandemic has exposed some industries more than others with employers in the retail, hospitality and leisure facing sustained pressure as a result of rolling lockdown restrictions designed to contain the spread of the virus.

Whilst newspaper headlines focus on well-known retail failures such as Debenhams, Arcadia, Peacocks and TM Lewin, these are just a handful of the businesses that are facing pressure – with a 106% increase in insolvencies in this sector to date.

Ongoing travel restrictions are also causing economic damage as European airport traffic faces up to an 86% decline on 2019 passenger numbers – good for the environment perhaps but very bleak for aviation businesses and communities that rely on airport employment.

The hospitality trade is also facing considerable pressure with a recent industry survey suggesting 75% of night-time economy and hospitality businesses will close by Christmas in Manchester a result of continued trading difficulties operating with local lockdown restrictions. 

3) Low Income Problem Debt is Rising.

According the Office of National Statistics, low-income households were significantly more likely to face problem debt and vulnerability prior to the Covid-19 crisis – with the bottom decile responsible for 15% of all problem debt.

Before the pandemic, the Money Advice Service estimated that 8.3 million people in the UK were over-indebted, and that 22% of UK adults had less than £100 in savings – making them highly vulnerable to a financial shock such as job loss or large unexpected bill.

Overall, the pandemic has pushed the total number of people in the UK living in poverty to more than 15 million – 23% of the population – according to the Legatum Institute.

Recent research from Citizens’ Advice shows that as many as 6 million people have fallen behind on at least one household expense during the pandemic with problem debt mounting for local authorities and utility providers in particular. 

4) Policymakers are Struggling to Respond

Another warning sign for 2021 is that policymakers and regulators are struggling to balance the need for debt forbearance with the economic reality of debt provisioning. 

This much was made clear in early November as the Chancellor of Exchequer was forced to extend both the furlough scheme and self-employment income support scheme despite original assertions, they would last for no more than six months.

Similarly, in the energy sector, Ofgem, has proposed lifting its cap on standard variable energy tariffs by £21 for an annual dual-fuel bill so that energy company cashflows are buffeted from the rising number of households that cannot afford their bills.

Both of these decisions indicate that the ongoing pandemic will continue to stretch private and public sector balance sheets well into 2021, despite initial optimism that the UK economy would bounce back into a V-shaped recovery.

Conclusion: Looking Ahead to 2021

The past year has been unlike any other in modern times.

While the rollout of approved and highly effective vaccines is a cause for optimism, there is much work to do to rebuild balance sheets, avoid preventable insolvencies and protect those most vulnerable as the economy responds to the economic impact of Covid-19.

There is no doubt that the road ahead will be difficult and that the unprecedented package of government support will have to be repaid with a carefully balanced programme of spending cuts or tax rises that could inhibit economic recovery over the next 5-10 years.

However, challenging times are often the catalyst for creative solutions, so it’s been encouraging to see innovation in the debt recovery space also.

From the Government’s continued package of support to Ofgem’s breathing space regulations committing utility firms to forbearance for vulnerable customers, both the private and public sector are rising to the challenge presented by the virus.

Find out more about our innovative debt recovery solutions in the public and private sectors