UK Markets open in 7 hrs 33 mins
  • NIKKEI 225

    28,809.38
    +286.12 (+1.00%)
     
  • HANG SENG

    29,962.47
    +320.19 (+1.08%)
     
  • CRUDE OIL

    53.28
    +0.04 (+0.08%)
     
  • GOLD FUTURES

    1,869.40
    +2.90 (+0.16%)
     
  • DOW

    31,188.38
    +257.86 (+0.83%)
     
  • BTC-GBP

    25,894.90
    -7.95 (-0.03%)
     
  • CMC Crypto 200

    696.42
    -4.19 (-0.60%)
     
  • Nasdaq

    13,457.25
    +260.07 (+1.97%)
     
  • ^FTAS

    3,816.31
    +22.40 (+0.59%)
     

Fears government can't stop 'meteor hitting planet business'

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
A sign is seen on the front of a closed cinema in York, northern England, on March 30, 2020, as life in Britain continues during the nationwide lockdown to combat the novel coronavirus pandemic. - Life in locked-down Britain may not return to normal for six months or longer as it battles the coronavirus outbreak, a top health official warned on Sunday, as the death toll reached passed 1,200. (Photo by Oli SCARFF / AFP) (Photo by OLI SCARFF/AFP via Getty Images)
A sign is seen on the front of a closed cinema in York, northern England, on March 30, 2020, as life in Britain continues during the nationwide lockdown to combat the novel coronavirus pandemic. (OLI SCARFF/AFP via Getty Images)

Fears are growing about the future of the UK economy, as experts warn that the government’s “unprecedented” package of support many not be enough to prevent a steep recession.

Bank of America on Thursday sharply downgraded its forecast for the UK economy this year, cutting its estimate of GDP growth from -2% to -7.4% in 2020.

It came as the Federation of Small Businesses and the Corporate Finance Network this week warned that millions of firms could collapse in weeks without a cash infusion.

The UK government has announced billions of pounds of support for businesses hit by the coronavirus pandemic, in the form of state-backed loans, tax relief, subsidies for employee wages, and grants. Rules around insolvency have also been relaxed.

However, almost a million people have already applied for unemployment benefits in just the last two weeks despite the support package.

Bank of America said: “UK stimulus measures [are] less effective than we assumed, with sizeable delays to funds flowing meaning a large shock develops.”

Sign in the wondow of closed down shop Primark on Oxford Street, London's main shopping and retail area normally full of thousands of shoppers and traffic is virtually deserted due to the Coronavirus outbreak on 23rd March 2020 in London, England, United Kingdom. Following government advice most shoppers are staying at home leaving the streets quiet, empty and eerie. Coronavirus or Covid-19 is a new respiratory illness that has not previously been seen in humans. While much or Europe has been placed into lockdown, the UK government has announced more stringent rules as part of their long term strategy, and in particular 'social distancing'. (photo by Mike Kemp/In PIctures via Getty Images)
Sign in the wondow of closed down shop Primark on Oxford Street. (Mike Kemp/In PIctures via Getty Images)

Duncan Swift, head of insolvency trade body R3, told Yahoo Finance UK: “The seismic shock caused by this event has basically removed cash from the system.

“If you’re in a position where you’re in the say hotel, leisure, pub, club trade, your revenue sources have completely gone to zero pretty much overnight, yet you’ve got bills to pay.”

The government’s hoped to address the cash crunch through its coronavirus business interruption loans scheme, which underwrites loans of up to £5m for small businesses. However, firms have reported difficulties getting the cash from banks.

The economic damage is being multiplied by the wide-ranging impact of the COVID-19 pandemic, which has reduced activity across almost all industries. Swift likened the impact to a “meteorite hitting planet business”.

Chancellor Rishi Sunak late on Thursday announced changes to the Treasury’s cornerstone loan guarantee scheme within days to get cash to businesses quicker.

But a bigger problem may be trying to convince business owners to take the loans in the first place.

“Nearly everything that directors are doing at the moment — and that government are telling them to do — is to take on additional credit and that is a very risky measure,” Ian Robert, an insolvency partner at Moore Kingston Smith, told Yahoo Finance UK.

“I, for one, wouldn’t want to advise many directors to kick the can down the road, take on all this debt and give personal guarantees as well, which is what most of the banks are asking directors to do.”

LONDON, ENGLAND - MARCH 17: Britain's Chancellor Rishi Sunak gives a press conference about the ongoing situation with the coronavirus (COVID-19) outbreak inside 10 Downing Street on March 17, 2020 in London, England. For most people, the new coronavirus causes only mild or moderate symptoms, such as fever and cough. For some, especially older adults and people with existing health problems, it can cause more severe illness, including pneumonia. (Photo by Matt Dunham - WPA Pool/Getty Images)
Britain's Chancellor Rishi Sunak gives a press conference about the ongoing situation with the coronavirus (COVID-19) outbreak inside 10 Downing Street on March 17, 2020 in London, England. (Matt Dunham - WPA Pool/Getty Images)

The Chancellor said a fortnight ago he would do “whatever it takes” to support the economy through the coronavirus crisis, suggesting further measures could be announced in the coming days and weeks.

Ultimately, however, the fast-moving nature of the COVID-19 pandemic raises the concern that whatever the state does may ultimately be too slow.

“Whilst the policy responses are positive in terms of their intent, the detail causes delay,” Swift said. “The risk is, doesn’t matter how big it is, if it isn’t delivered when it’s needed businesses are going to implode.”

Bank of America forecasts UK unemployment to peak at 6.9% this year, up from 3.9% at the start of the year. That estimate — which would equate to around 1m extra job seekers — already looks conservative.

“With such a fast moving crisis, everybody is playing catchup,” Swift said. “We are into wholly uncharted territory.”

Watch the latest videos from Yahoo UK