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Coronavirus: How the Global Economy Could Catch a Cold

If the Coronavirus takes hold in the UK, how would the economy be impacted and why is the Government not reassuring businesses?

How the Global Economy Could Catch a Cold

If the Coronavirus takes hold in the UK, how would the economy be impacted and why is the Government not reassuring businesses?

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Forget Brexit, if the Coronavirus is not brought under control within the next couple of months the economic fallout could be unimaginable.

The stock market is the beginning of the indicator that all isn’t well, losing 3.5% since the beginning of the week. At the start of the crisis, importers, retailers and manufacturers reported concerns about supply chains being affected. Apple, Samsung and Adidas, to name a few, all warned that their profits could be adversely affected by a lack of stock coming in from suppliers.

In the UK, more than 250,000 businesses import products for consumer markets – largely from China. The threat of a broken supply of goods is a real concern and businesses with capacity will be increasing their purchase orders and stretching their cash flows in order to secure supply. 

But, the bigger ramifications are only now becoming clear.

If it hits the UK in any meaningful way, the virus will have a significant economic impact on high street shopping, tourism, the leisure industry – including gyms, pools and cinemas. All of these also rely on additional revenues from retail add-on sales to bolster slim profit margins.

If sales fall, these businesses will attempt to protect their cash flows by cutting costs (a normal and sensible course of action), but such measures may include asking staff to stay at home, reducing salaries and even redundancies. The knock-on effects of this could be a reduction in discretionary spend, particularly in the small and medium-sized enterprise (SME) market, triggering the same chain reaction across these businesses as they also try to stay afloat.

99.9% of all UK businesses are classed as SMEs, employing between one and 250 people – such businesses are the backbone of the country. They live hand-to-mouth, needing trade finance, invoice discounting and numerous other banking support mechanisms to ensure that they have the cash to stay afloat. Paying staff at the end of the month relies on sales and continued business. If products don’t sell, orders aren’t repeated. Larger companies then lay off staff so that cash flow can be preserved, in order to continue trading. A drop in sales leaves a cash flow hole and a prolonged fall in sales can result in bankruptcy. With employees – who need to pay rent and mortgages – on reduced wages or made redundant, a much bigger crisis is not inconceivable.

Most SMEs will not have disaster insurance in place and the insurance industry is already talking about the massive impacts any prolonged interruption could have – it simply would not be able to cover all the losses. This would mean that many small businesses wouldn’t have the money to stay in business whilst their insurance claims are processed and adjudicated or to fight any dispute.

Whilst the mainstream media spreads panic over the Coronavirus, where is the Government in all this? Nowhere to be seen. 

The Health and Social Care Secretary Matt Hancock has concerned himself with public health broadcasts, proclaiming that the NHS is well prepared. But there has been no word of advice from the Chancellor or the Business Secretary on how businesses should prepare or what support the Government would offer to them. Nothing has been said by the Prime Minister.

The fallout from consumers not consuming and then those consumers not being paid could push the UK into a significant crisis, which may be hard to imagine but could be just around the corner.

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