British business is in surprisingly good shape

THE ECONOMY shrank by around 10% in 2020, the largest drop in a century. There has been a steady drumbeat of corporate collapses, with high-street retailers such as Topshop and Debenhams and restaurant chains such as Café Rouge going down the tubes. Yet British business has rarely been in such rude health.

Despite the pain in the hospitality and retail sectors, company insolvencies in England and Wales fell by a fifth between 2019 and 2020. While overall business profits slipped in 2020, the impact was far less severe than in the financial crisis of 2008 or the early-1990s recession. And British businesses have never held so much cash.

Surging corporate bank deposits do not usually accompany a recession. According to an analysis by the Resolution Foundation, a think-tank, the past four British recessions have seen corporate cash holdings shrink by an inflation-adjusted average of £40bn. But over the last nine months of 2020 firms added almost £120bn ($165bn) to their bank balances, taking the total up to over 30% of GDP (see chart).

The uneven recession is part of the explanation. While physical retail, hospitality and travel have been crushed, other industries have got off lightly. “I’ve got companies in my portfolio which have been ordered to basically shut down by the government, but I’ve got others for whom 2020 has meant lower rent and interest costs,” says an investment manager. According to the Office for National Statistics (ONS), over two-fifths of British firms report that covid-19 has either had no effect on revenues or has increased them.

The government has absorbed much of the cost of the lost output. Aside from the almost £60bn it has spent picking up 80% of the wage bill for furloughed workers through the Coronavirus Job Retention Scheme, it has given firms direct grants and tax cuts worth over £25bn and £85bn of cheap, state-backed loans, while deferring over £2bn of tax payments.

Some companies are using their cash to buy others. Kevin Ellis, senior partner at PWC, a professional-services firm, says his deal-making advisory practice has rarely been so busy. Cash-rich firms, he says, want to buy those that are good at tech. The trade deal with the European Union may give dealmaking a further impetus. “We’ve had this huge amount of uncertainty hanging over Britain for almost five years and people have been keeping their powder dry. What you are seeing now is those war chests going to work,” says a banker.

But if larger firms have been building piles of cash, smaller firms are feeling less flush, according to the ONS. They are twice as likely to have no reserves than larger ones. Tony Danker, head of the Confederation of British Industry, a trade body, fears that small firms that have reserves will use them up quickly. The first repayments on government-backed loans are due in May and the economic outlook remains highly uncertain.

Faced with a budget deficit of around 20% of GDP, the chancellor, Rishi Sunak, is keen to start reducing state support to business. The furlough scheme, for example, is due to end in April. Officials worry that the borrowing-funded largesse over the past year has been spread too broadly and much of it has ended up in corporate bank accounts rather than supporting spending. Keen to get its hands on some of the cash pile, the Treasury is floating ideas such as increasing corporation tax or introducing a tax on online sales. Business leaders suspect the Treasury is throwing out these ideas ahead of the budget in March to see which arouse the greatest opposition, and which are more likely to fly.

Amid a bonanza of dealmaking and a massive corporate cash mountain there are large clusters of firms that will need more support if a sharp rise in unemployment is to be avoided as government schemes wind down. The challenge for the Treasury in the budget will be to find a way to target help where it is required as Britain’s economy begins to reopen. ■