Guides & Advice

The UK officially enters recessions | what does it means for your sector?

On 12 August, the UK officially entered recession after the economy suffered its worst months on record between April and June

Although largely inevitable after the restrictions that lockdown placed on the country, it is still not the news that any sector wanted to hear. So, what could the impacts of the UK’s first recession in 11 years be?

From general business and investment funds to energy and education, our experts provide their thoughts on what the future has in store.

General business

Over the last few months, there has been a considerable rise in the number of insolvencies. The high street was struggling even before the pandemic, with the closure of restaurants and the forced move to online shopping having been the very last things that many businesses needed.

Andrew Taylor, one of our insolvency partners, said:

“The insolvencies and job cuts we’ve seen over recent weeks have been leading up to this point – now an official recession is here and the economy has bitten back with GDP tumbling by a record 20 percent.

“Cue suffocation of cash flow, with businesses paying more slowly while asking their clients to pay quicker. Those that aren’t struggling should make sure they are paid before their debtors run into deeper financial difficulty.

“Where possible, businesses will want to pay their suppliers on 30 to 60-day terms if their clients are doing the same. It’s also wise to have alternative suppliers on standby, just in case they withdraw from the market, become too expensive, or go bust.

“While the horse has indeed bolted, it’s not too late for businesses to plan for what’s to come. Directors must not bury their heads in the sand. The sooner they seek professional advice and act, the more options will be available, and the quicker they can protect their company’s creditors, the business, and most importantly, themselves.

“This is only the start and, while the wider economy will bounce back, only those businesses that have a healthy balance sheet and have adapted to ‘the new normal’ and changes in consumer habits will survive this recession.”

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Investment funds

As an increasing number of businesses struggle due to the financial pressure put on them by COVID-19, it has become difficult for investors to know where it is safe to put their money. However, continued investment is vital to the UK surviving this recession.

Kavita Patel, our head of investment funds, said:

“Private investment has played a pivotal role in the UK economy and this will need to continue as we head into a recession and during the recovery as we come out the other side.

“While existing investment portfolios may continue to see further valuation reductions, the normal ups and downs of economic cycles should mean that this will recover if investors can hang on long enough.

“Continuing to support good businesses will help them manage through the crisis and give them the best platform to grow. Whilst it may remain tough for many for some time, history has shown that there are always good investment opportunities in any market. What’s clear is that with interest rates likely to remain low, investment in UK businesses continues to provide an important route for wealth creation which, in turn, will support economic recovery.”

Andrew Whitehead

Senior Partner & Head of Energy

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Energy

There are two sides to the coin when it comes to the energy sector during the recession. To meet the country’s climate change goals, the Government must continue to invest in renewable energy, ensuring a level of stability in this area. However, it could be a different story for those in the retail supply sector.

Andrew Whitehead, our head of energy, said:

“The energy sector’s fortunes in many ways are aligned with the Government’s climate change ambitions (and obligations), and it is crucial that spending our way out of recession benefits the green economy, including continued investment and support for energy efficiency, renewable energy and electric vehicle charging infrastructure. This is especially important with the UK hosting the next round of global climate change talks in Glasgow next year.

“Elsewhere, the retail supply sector, already in some turmoil as a result of a combination of price caps and volatile wholesale energy prices, has been struggling to react to the change in consumption patterns and a mandated go slow on household debt recovery. Those suppliers serving industrial and commercial customers have been exposed to the downturn in consumption as shops and factories have closed, and a spate of corporate customer insolvencies looks set to increase in coming months. In such a volatile environment, we can expect to see increased transaction and M&A activity.”

Education

In past recessions, the education sector has benefitted from increased funding, but this may not be the case this time around. Will the UK see a structural change in higher education?

Smita Jamdar, our head of education, said:

“Ordinarily higher and further education are counter-cyclical when it comes to recessions because governments tend to invest in education and training. This government has made it clear that it wants to invest in technical and vocational skills which it sees as key to the levelling-up agenda.

“So far, that has been reflected in lots of warm words and some money for FE, but the investment gap is potentially still huge, especially to compensate for cuts to funding since 2010 and so I hope to see more.

“The Government seems less keen on higher education and there have been numerous alarming comments about too many people going to university and that widening HE participation may no longer be a priority. Universities have been hit hard by COVID-19 and Brexit and it remains to be seen whether securing the future of universities will become a focus for the Government, or whether this is seen as an opportunity to allow some to reduce in size, and possibly merge with other institutions.”

The recent pandemic has proven just how innovative we are as a nation.

The last six months in particular have been difficult for organisations across all sectors, with some industries being affected harder than others.

Recession is never a term that businesses or people want to hear, but the country has recovered before and it will again. Business will continue, even if it has to take a slightly different form.

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