Risk of Business Failure - POID Tracker

by Peter John Lambert, Apolline Marion and John Van Reenen

Summary

We continue tracking the proportion of UK businesses at-risk of permanently closing, using ONS BICS survey data
The proportion of firms at-risk of closure dropped substantially over the 15 month period - from 15% in January 2021 to 5.7% in April 2022
This recovery stalled following the winding up of the furlough scheme at the end of September 2021
Recent global events appear to be increasing business risk, especially amongst SMEs
We show these data closely track GDP growth, redundancies, and COVID-related uncertainty

Latest Findings

The share of businesses who are at risk of failure has fallen to 5.7% in April, according to the Business Impact of COVID-19 Survey (BICS) run by the Office of National Statistics (ONS). This is substantially lower than the peak of 15% at the beginning of 2021. The drop was primarily due to improvements in the outlook of firms with fewer than 50 employees.

To study business risk, we focus on the BICS question generally collected every two weeks which asks: “How much confidence does your business have that it will survive the next three months?” We classify the proportion of businesses who respond with “low” or “no” chance of survival as being at-risk of closing permanently.

Figure 1 shows how the proportion of at-risk businesses has evolved since the beginning of the survey in October 2020. The share of at-risk firms peaked in January 2021, which coincided with a large unanticipated lockdown. Since this peak, there has been a steady decline. This recovery began to stall after the end of the furlough scheme and around the time the Omicron variant arrived.

Figure 1: Percentage of Businesses At Risk of Exit Over Next 3 Months

Note: Data comes from the Business Impact of COVID-19 Survey (BICS). Our measure of “At-Risk” firms is defined as those businesses answering that they had “Low” or “No Confidence” to the question “How much confidence does your business have that it will survive the next three months?” The BICS survey samples roughly 10,000 businesses every two weeks. We take the closing date of the survey sample window as the date. This question was included in the survey from Wave 14 (21st September 2020 – 4th October 2020) to the most recent Wave 53 (21st March 2022 – 4th April 2022), excluding Wave 15, 34, 36, 38, 40, 42, 44, 46, 50 and 52, where this question was not asked. The responses are weighted by firm size to make the responses representative. This weighting is done based on the firm employment size distribution from the Inter-Departmental Business Register (IDBR) - which is also the sampling frame for the BICS. Key dates come from a variety of sources, listed at the end of this piece.

Share of At-Risk SMEs on the rise

The latest findings show that 5.7% (1-in-17) firms are at risk of failure. While overall trends have remained well below the 2020 levels, recent increases in the proportion of at-risk are of concern. This increase is especially worrying for small firms with fewer than 50 employees.

Figure 2 below shows that since the share of at-risk firms in the 0-9 employee and 10-49 employee category has risen sharply during Q4 2021 and Q1 2022. This is likely to be driven by the end of the furlough scheme (30th September, 2021) as well as Omicron (December, 2021) and rising energy prices.

Figure 2: Share of At-Risk Firms, broken down by firm size

Note: See notes to Figure 1. The responses within each size band are weighted to make the responses representative, based on the Inter-Departmental Business Register (IDBR).

Previous Findings

The survey question we study has been asked since mid-September 2020, with the first results published in October 2020. We began reporting on these data in January 2021. We also documented the beginning of this recovery back in August 2021, just before the end of the furlough scheme in the UK. The recovery was associated with three key developments: (i) The easing of lockdown restrictions; (ii) Vaccine rollout and (iii) the decline in COVID deaths.

As Covid recedes, new challenges such as the Ukraine crisis has arisen. We next compare the POID Business Risk tracker data with other important macroeconomic series.

Comparison of our measure to other macro series

We focus on three key areas of the recovery: (1) GDP growth, (2) redundancies, and (3) economic uncertainty.

(1) GDP Growth

Figure 3 shows the co-movement of at-risk businesses and GDP. The dashed green line, with index on the right-hand-side shows GDP changes (relative to 2019 levels). The peak of at-risk firms we saw in early 2021 aligns with the largest GDP losses of 8.5%. As the share of firms at-risk began to fall, GDP began to recover, returning to 2019 levels of output by October 2021.

Figure 3: At-Risk Firms vs GDP Growth

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. The GDP percent change relative to Index Year 2019 is calculated as the monthly GDP Index minus 100 and divided by 100. Data is sourced from here (accessed on 30/03/2022).

(2) Redundancies

Figure 4 shows that the number of redundancies (rolling three-month average of redundancies per 1,000 workers) has also fallen dramatically, in line with our series. From a peak of 14.2 for the period ending in November, we are down to historic lows of near 3.

Figure 4: At-Risk Firms vs Redundancies (per 1000 Workers)

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. We use the three-months rolling UK redundancy rate, per 1,000 workers, people aged 16 years and over, not seasonally adjusted, between October 2020 and January 2022. The redundancy rate is the ratio of the redundancy level to the number of employees in the previous quarter, multiplied by 1,000. Data is sourced from the ONS and can be accessed at this link. We take the end date of the period window as the date (e.g. for period window August 2021 to October 2021, we use 1st October 2021 as our date).

(3) Economic Uncertainty

Figure 5 shows a series of COVID-19 related uncertainty, extracted from the Decision Makers Panel (DMP). We focus on the question: “How important is the spread of coronavirus (COVID-19) as a source of uncertainty for your business?” The dashed purple line in Figure 5 tracks the share of those respondents who answered “Largest source” to this question. Again, these series exhibit strong correlation, and both show the transitory upward shock during the Omicron wave.

Figure 5: At-Risk Firms and COVID-19 Uncertainty

Note: See Figure 1 note for discussion of the number of “at-risk” businesses. The “COVID-19 Uncertainty” represents the percentage of respondents who answered “Largest source” to the following question: "How important is the spread of coronavirus (Covid-19) as a source of uncertainty for your business?" through the Bank of England’s Decision Maker Panel (DMP) Survey. It is a monthly survey of around 3,000 Chief Financial Officers of small, medium and large firms in the UK, operating in a broad range of industries. Data have been weighted by industry and firm size to be representative of the population of UK businesses with at least 10 employees. Data was accessed on 7/04/2022 at this link https://decisionmakerpanel.co.uk/data/

Conclusion

In early 2021, 15% of firms thought they were at risk of going under, but by October this had dropped by two-thirds. This recovery stalled after the end of the furlough scheme and the Omicron wave over the winter, so that in April 2022 around 5% of firms remain at risk.

The increase in at-risk firms with fewer than 50 employees is especially concerning, as these are businesses most vulnerable to cost rises from tightening Brexit controls, the Ukraine crisis and other supply chain disruptions.

We also continue to monitor the impacts of the £79.31 billion in business debt issued during COVID. This money was a lifeline for business during the crises, but may also depress hiring and investment as firms prioritise repayment over growth.

References:
Timing of lockdowns and policy announcements gathered from various web sources including:

Changes to Government’s Business Support Schemes primarily from:

About the authors

Peter John Lambert is completing his PhD in economics at LSE, funded by the 2018 Commonwealth Scholarship Award. He also works in the Centre for Economic Performance - Growth Research Programme - as well as for the Programme on Innovation and Diffusion (POID).

Apolline Marion has completed her MSc in Economics at the LSE, and currently works as a researcher for the Programme on Innovation and Diffusion (POID) and the Centre for Economic Performance (CEP).

John Van Reenen is the Ronald Coase School Professor at LSE and the Gordon Y. Billiard Professor of Management and Economics at the Massachusetts Institute of Technology, where he is jointly appointed in the department of economics and the MIT Sloan School of Management. He is also an associate in the Growth Research Programme at the Centre for Economic Performance (CEP). He was appointed an Officer of the Order of the British Empire (OBE) and received the Yrjö Jahnsson Award.

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