It’s been a tough start to the year for the UK – with economic improvement and recovery being delayed from 2020 forecasts by continuing lockdowns and additional restrictions being put in place. Uncertainty continues to prevail even as society seems to be recovering from the coronavirus pandemic, so if one things for sure: it’s that nothing seems to be! Now, as we hit the midpoint of 2021 and life begins to ease into what is being branded by many as ‘the new normal’, we examine the progress made in tackling the Covid-19 pandemic. Can we expect a strong economic recovery, or should businesses – and individuals – yield caution?
Is the ‘Road to Freedom’ the ‘Road to Recovery’?
On 22 February, Prime Minister Boris Johnson outlined a “one way road to freedom”. Although this roadmap has since seen some changes, it did result in schools, non-essential retail and hospitality re-opening in phases. While much of the plan was slower than the nation had hoped for; with further delays extending it even further; it has seen economic growth forecasts for the UK upgrade.
Real GDP growth is forecast to rise through 2021 and 2022 respectively. As businesses increase their confidence and trading conditions stabilise, things look bright for even the smallest and most niche of enterprises. Overall, its expected that GDP will rise back to equal or above its pre-pandemic peak by the end of 2022 – a really positive forecast.
Inflation is also likely to rise as the state-provided aid for industries fades, but analysts expect this to be a short-term change and to fall back within a couple of years.
The Current Economic Climate’s Vulnerabilities
Inventory Build Up
The impact of Brexit on trade has been largely underreported and misunderstood as other issues – namely, of course, the coronavirus crisis – has overshadowed the news cycle. However, the impact has been vast. The value of exported goods to the European Union (EU) in January 2021 fell by £5.5 billion – a 40.5% drop – while imports were down some £6.6 billion, a 28.9% drop. The sharp increase of trade before the UK finally left the block has immediately been wiped out as a result.
The build up of inventories by the UK in its last-minute trade boost did help the country avoid a technical recession, boosting GDP growth just in time. However, these inventories are now at an unprecedented level and it’s likely we will see companies reducing production and possibly even discounting stocks to clear excess inventories.
The beauty of a Refresh Renovations Franchise, is that there is no stock holding and projects are stocked on an ad hoc basis. Due to the way the model is processed, Franchisees are never stuck with up front costs for projects, and our staged payment system with customers means that the customer always pays up front for work before it is completed.
Dependency on Furlough
The official unemployment rate for the three months in to December 2020 was 5.1% but this did not include the 4.7 million employees still relying on the furlough scheme; an impressive 13.8% of the working population, nor the 2.2 million self-employed people receiving aid (6.4%) or the over 3 million excluded from the aid schemes altogether (8.8%). It is estimated, therefore, that the true unemployment figure is closer to 20%.
Although Chancellor Rishi Sunak did initially ask firms to contribute toward the cost of the furlough scheme, he quickly backtracked – leaving the whole bill down to the exchequer.
As the economy opens up and support is withdrawn, the official unemployment rate is actually like to rise to around the 6% mark. Although those on furlough will be able to return to work, many businesses simply won’t have weathered the storm and will be forced to lay staff off.
Refresh Renovations franchisees rarely hire staff on a permanent basis due to the nature of the business, and most staffing comes in the form of either hourly or project by project support, so our franchisees have not been stuck with furloughed staff or unreasonable outgoings during the various lockdown periods.
Governmental Response and Support
In only his second annual Budget, Rishi Sunak extended most pandemic related support measures to September 2021. This would raise borrowing by a further £67 billion (3.4% of GDP) over this financial year and next (chart 7).
It’s intended that government supplied support measures will be reduced in 2022 and removed entirely by the end of 2023. This works to capture more tax just as the public’s income levels start to rise.
We will also see an increase in corporation tax – which will see levels return to highs not seen since the mid 70s. This is, by some, considered somewhat overdue, as it’s the first since 1974; but others are concerned that it will make the UK a less appealing base for companies, particularly given the country’s recent exit from the European Union.
This said, there are plenty of government incentives in place to help encourage business investment, including the much-lauded ‘super deduction’ on investment costs. This allows companies to reduce their taxable profits by up to 130% of the cost of investment projects – a vast saving for even those without huge investment budgets.
The super deduction is intended for investments on plants and machinery, and will be capped at 25% of profits overall; a welcome boost for construction and manufacturing industries but unfortunately of not much use to the service sector.
Home Renovations on the Increase
All indicators point to an increase in home renovations and improvements, with home owners choosing to improve rather than move. This puts Refresh Franchisees in a very solid position to attack the new post-covid market with gusto and make the next few years record breaking!
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