Economic growth

On firm ground?

The impact of Covid-19 on firms and what policy makers should do in response

The coronavirus crisis has had huge repercussions across the economy, and the corporate sector is no exception. This paper analyses how the crisis has affected firms’ finances, puts that in context compared to previous recessions, and assesses the ability of firms to contribute to the post-crisis recovery. This is important because firms’ investment and hiring decisions will determine the speed and extent of that recovery.

The unprecedented contraction in economic activity when the pandemic hit led to sharp fall in firms’ revenues. But government support schemes have largely been able to protect firms from the worst of the crisis – unlike past recessions, company liquidations have fallen and cash buffers have increased. But firms have taken on more debt and – particularly in sectors relying on face-to-face services – there are pockets of strain with the proportion of the hospitality sector reporting fewer than three months of cash reserves has risen from a third to over half in the past sixth months.

Government policy needs to focus on protecting firms over the next few months of the crisis through additional restriction grants, business rates relief and CJRS extension. Longer-term the government should focus on providing fiscal stimulus to ensure a swift recovery in consumer demand, helping business investment bounce back, but also making sure that higher debt does not become a headwind to the recovery.