According to the FT this morning:
More than a quarter of companies forced to take on extra debt to survive the pandemic have warned they may need to cut back their operations, highlighting a mounting crisis that economists warn could hold back business recovery in the UK.
They add:
More than 40 per cent of companies took on debt during the crisis, according to a survey conducted by the British Chambers of Commerce and banking group TSB. While one in four warned over their future growth plans, about a tenth said they may cease trading altogether.
The claim that 40% of companies took on debt during the crisis is very clearly misleading. Government data suggests that more than 1.5 million companies have now had financial support for Covid 19 reasons. HMRC data suggests that there are about 1.6 million companies which have trading income in the UK. Where TSB get their data from is, in that case, hard to know. What is clear is that the problem must be bigger than they suggest: the vast majority of companies in the UK actually took on debt to manage the coronavirus crisis.
And what the report says is that many of these companies are at risk already. And that's before the economy does in many ways really turn down, because there has been a phoney war and massive extended credit to date.
But even without having to extrapolate the data very much it is apparent that if most companies took Covid loans and maybe 10% think they might close then with the private sector engaging approximately 25 million people in the UK at present that might be 2.5 million jobs to go, and more given that many other companies are warning about their growth plans. My suggestion that more than 5 million people might be unemployed still looks to be depressingly realistic, especially when it is recalled that most companies wildly over-estimate their ability to survive. The Office for Budget Responsibility does, for example, think the failure rate will be much higher than this survey suggests.
I am not cheered, in other words.
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I have been thinking lately about sectoral balances and the macro -economy. The time has come I have concluded to think not of 3 sectors (public, private, overseas) but 4. The financial sector has now grown into a parallel universe, detached from the rest of the economy and so it is time to think of it as the fourth sector in the context of sectoral balance analysis. In the UK the overseas sector is in surplus (big UK trade deficit). The government has a large deficit. The private sector has a large deficit – personal and corporate debt are both at very high levels. It therefore follows that the financial sector has an enormous surplus. The recent figures you quoted Richard for the composition of wealth in the UK (in relation to the wealth tax debate) gave pension fund wealth at £5.4tr and “financial wealth” at £1.2tr Thats a total of £6.6tr – getting on for 3xUK GDP I think. Its no wonder asset prices bear no relation to what is going on in the real economy. The conduit through the worm hole joining these two parallel universes involves our pension funds as well as the commercial banking sector. There are welcome proposals being advocated to create a state investment bank. That should help te real economy without pumping up the financial bubble but something needs to be done about pension funds too. Their role in the global financial system remains largely invisible and very few people are talking about it.
You have the data?
You do know that it is common to use 4 sectors, don’t you?
Households are split from business
In that case maybe we should be looking at 5 sectors, if the private sector is sub divided. Both of them are in deficit.
UK personal debt at the end of January 2020 £1680bn; UK corporate debt reached £443bn in 2019. The other data quoted is the data you provided on the composition of UK wealth in your post recently regarding the subject of a wealth tax.
Bit not measured in the same way Jim
Any idea what the right numbers are and where to find them? Whatever they are I’m pretty sure that they will show the personal and corporate sectors deep in deficit along with the public sector (different numbers getting banded about there too) and the financial sector in big surplus and experiencing asset price inflation…. a parallel universe as I think it is. Virtually no inflation in the real economy but definitely going on in the financial sector.
I genuinely don’t know
“My suggestion that more than 5 million people might be unemployed”
That is encouraging. Only a couple of weeks ago you were predicting 6 million. What has changed to reduce your earlier prediction by a million jobs?
More than 5 is 6
I think your idea of a ‘National Wealth Service’ is excellent, which would of course deal with this issue, but surely what is needed is some sort of ‘sector by sector’ plan including business representatives and local authorities that would be looking at plans for a ‘Post Covid’ future and either supporting business’s and charities until the current emergency is over or allowing them to be wound up in an orderly way?
It could or should of course also include job creation plans for those employed by sectors or business’s that have been closed under the scheme
Agreed
[…] If 10% of companies who took Covid loans think they might cease trading we’re in deep trouble Richard Murphy […]
Mr. Murphy, I feel you are prescient and speaking for myself, I’m terrified of what’s coming. In America my fellow citizens are still spending. Port of Long Beach is now showing an up trend in container traffic. At the same time, airlines aren’t flying near capacity, restaurants and other service business are nowhere close to capacity, and in a country with so much of GPP based on services, I don’t see how it continues to hold up. No, we’re not the UK where you have your own challenges, but we’re all part of a connected world. A year from now, I fear for where we are. Especially if Biden wins and taxes go up to fund the green world. we’ve drawn a bead on $30T, what happens if liberal social programs kick into high gear? Who buys our bonds, then?
Please read Stephanie Kelton ‘The Deficit Myth’ – it will answer many of your questions