The potential long-term effects on business and economic prosperity from the Covid-19 crisis

For the UK, and to some extent the EU, the emergence of Covid-19 may well result in economic meltdown the like of which we have not experienced in our lifetime.

In the present climate, it is nigh on impossible for business leaders and small to medium-size enterprises to plan for the future. As we have all witnessed over the past six weeks, the Government have issued edicts to every business in the land and as of today, some six weeks after the crisis started, there is still no end in sight as to when the lockdown may be lifted. Furthermore, it has been reported in the mainstream media that there may be a second wave of the virus. This unprecedented situation is putting an intolerable strain on the global economy and will call for unique and creative business solutions to enable a sustainable rebooting of the economy.

The economic historian, Robert Higgs, describes this as ‘Regime Uncertainty’ and said it is a “pervasive lack of confidence amongst investors in their ability to foresee the extent to which future government actions will affect them.“ By investors, I do not mean city traders in sharp suits. I mean the barber who sets up his shop and employs others to grow his business. Or the postgraduate with a great idea on an accelerator programme. Essentially, I am talking about the small to medium size businesses which are the engine of the economy. These are the essential businesses which local government will come to rely on heavily in the coming months and years ahead. These are the services which will help the vulnerable people in our community to heal from this crisis.

 

With regards to investments, in the short term, people will choose safe havens for their savings, such as banks, and turn their backs on riskier options such as stocks and shares as the markets attempt to grapple with the new global order. History has shown us that whilst large employers in retail for example, have been allowed to go bust, banks have always been protected by the state. That said, the Covid-19 outbreak has the potential to upend government policy completely and the usual safe havens for investment will also be threatened.

As we speak, 25% of businesses UK-wide has stopped trading. To put this into context, where I live in Scotland, Scottish tourism has ground to a halt as we enter the Spring months. One in 12 people in Scotland work in the tourism sector, a workforce of about 250,000. This sector grows on average of about 2.3% a year which equates to approximately £11 billion in tax receipts for the Scottish treasury, compared to just 0.8% for the rest of Scottish industry. Therefore, if the tourist summer season does not materialise due to the current crisis, this will be a hammer blow to one of Scotland’s most important and profitable sectors. In wider terms, Scottish tourism supports the finance sector to the tune of £1bn in salaries, so even bankers and accountants will find themselves out of work.

Food for thought!

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