Cash & Liquidity ManagementInvestment & FundingEconomyBoE director: UK economy ‘scarred’ by coronavirus

BoE director: UK economy ‘scarred’ by coronavirus

Alex Brazier, executive director at the Bank of England said the government and the Bank has acted quickly to minimise the damage caused by coronavirus, but more must be done to protect the economy

The economic fallout from coronavirus has caused “scarring” to the economic “muscle” of the UK economy, said Brazier.

Continuing with his anatomical comparison, Brazier said the government and the Bank of England must continue to provide support to UK businesses to prevent a more serious “tear” in the economy. He made the comments while speaking at the Virtual CFO Agenda as he outlined the Bank of England’s response to the coronavirus crisis.

“Scarring of our economic muscle could easily arise. To sustain employment and productive capacity, businesses will need to continue to pay wages, leases, invoices and fixed costs at the same time as revenues in many cases are collapsing. And many long-term viable businesses will face cashflow disruption and cashflow shortfalls that unless they can be financed or bridged will result in redundancies, failures, closures and the scrapping of productive capacity.

“It’s that which we’re trying to avoid. Now, signs of it are already evident and if it happens in scale, upheaval like that could actually tear the muscle fabric of our economy in a way that may prove very difficult to put back together afterwards,” Brazier warned.

Brazier said the Bank of England had analysed the largest 85,000 companies in the UK and found that 60 percent of them would suffer a cashflow shortfall this year.

He added that the measures of support for business announced by the government in the last few months, like the furlough scheme and VAT deferral scheme, have cost around £135bn. Despite these “powerful” measures, there is still much more to be done to retain the “productive potential” in the UK economy.

“The scale of the economic disruption we’re facing means that even after those very powerful measures, the businesses we’ve looked at, these 85,000, accounting for three quarters of turnover in the economy, they will face a cumulative cashflow deficit this year of around £140bn if they want to preserve their productive capacity.

“That means there’s quite a big need now, if we’re going to preserve our economic muscle, towards raising external finance from banks, from markets, and from other sources. So, the monetary policy response and the fiscal policy response have this time, been complimented with a financial policy response and that’s centred on two things: Getting markets functioning again, and getting bank lending flowing,” Brazier added.

The Bank’s executive director argued that important reforms to the financial sector had been made since the 2008 crisis which meant banks had the means to support businesses through these difficult moments in a way that wasn’t possible in 2008. However, despite banks lending at an unprecedented rate, it wouldn’t prevent all businesses from going under.

“It is inevitable that some companies will fail. We are already beginning to see redundancies, we are already beginning to see corporate closures, and over coming months and quarters business insolvencies and unemployment will rise, we have to recognise that.

“If we’re to limit the economic scarring that results from this, we need to be in a position where new companies and young companies can grow to take place at the productive capacity that we’ve lost. And that means opportunities for re-employment, that means opportunities for new productive capacity to grow and all of that will require new equity finance,” Brazier said.

Equity finance would become key to the “recovery phase” said Brazier, as the government and the Bank of England needs to encourage firms to grow, not feel weighed down by the extra debt they took on during the lockdown.

“The challenge is to give as wide a range of companies as possible every opportunity to access what you might call growth capital. By which I mean capital that’s willing to invest in assets like unlisted equity, that can’t easily be traded and doesn’t deliver a quick or stable return. In other words, assets that require a degree of patience and are highly illiquid to invest in.”

Brazier added that the financial system had more work to do to make equity finance reach all the corners of the corporate sector and protect the economic muscle of the UK.

“More equity will be needed help companies that are already highly indebted to help grow new companies, and to enable companies that feel they have an overhang to work it off. That need for more equity finance creates a case for the authorities to try and be ambitious in reforming the system where it’s needed and warranted.

“The financial system could be the difference between an economic muscle strain and from which we recover relatively quickly and a tear in the fabric of our economic muscle that hampers our economic performance for some time to come.”

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