The Covid-19 (Covid) pandemic has had a large impact on British businesses. Two years on since the start of the pandemic, this piece takes stock of how businesses were affected, the extent to which things have recovered and it discusses where the effects of Covid are still being felt. It uses data from the Decision Maker Panel (DMP), which is a monthly survey of around 3,000 Chief Financial Officers of small, medium and large firms in the UK.
The impact of Covid on sales, employment and investment
The spread of Covid and measures to contain it led to a large fall in sales. Looking back, in 2020 Q2 businesses estimated that their sales were around 30% lower than they otherwise would have been (Chart 1). Since then sales have gradually recovered, but with further, smaller, dips down, in 2021 Q1 due to additional measures to contain the Delta variant, and again more recently as a consequence of the emergence of the Omicron variant. The estimated impact of Covid on sales worsened from -4% in 2021 Q3 to -6% in 2021 Q4 and -7% in 2022 Q1, which is likely to be related to the effects of the Omicron variant. But this was a relatively small change relative to the effects on sales seen earlier in the pandemic.
The pandemic did not affect all firms and industries equally. Industries that rely on personal interactions or travel have been hardest hit. The estimated falls in sales in the early part of the pandemic were largest in accommodation and food and recreational services, and they continue to be among the most affected industries in the latest data. Anayi et al (2021) discuss which firms and industries were most affected by Covid in more detail.
Looking ahead, respondents to the February 2022 survey expected the impact of Covid on sales to continue to ease during 2022, from -7% in 2022 Q1 to -4% in 2022 Q2, and approximately 0% in 2022 Q3, with the impact expected to rise to around +1% over the medium term (2023 and beyond). This represents only a slightly slower recovery compared to firms’ pre-Omicron expectations, as the new variant was revealed to be milder than originally expected. So by the second half of next year, businesses expect Covid to be having little impact on their sales, on average, although within that there are still around 15% of firms who expect sales to be higher than they would have been and 20% who expect sales to be lower.
There was also a large fall in employment during the pandemic. Employment is estimated to have fallen more slowly than sales, with the impact of Covid estimated to have peaked at -9% in 2020 Q3. Falls in employment were smaller than those in sales, in large part due to government support programmes, such as the Coronavirus Job Retention Scheme (CJRS). The per cent of employees on furlough gradually declined after February 2021, and the CJRS officially ended in September 2021 (Chart 2). In the February 2022 DMP survey, the impact of Covid on employment in 2022 Q1 was estimated to be -4%, marginally worse than in 2021 Q4 (Chart 1). The effect was expected to ease to -2% in 2022 Q2, and -1% by 2022 Q3.
Lastly, Covid has also led to a large fall in investment. Investment initially fell by more than sales in the early part of the pandemic, and remained weaker than sales until the end of 2021. However, investment appears to have been less affected by the Omicron variant than sales, and in 2022 Q1, the impact of Covid on investment was estimated to -6%, compared to -7% for sales. The investment impacts were also expected to wane over the coming quarters, and at a slightly faster pace than for both sales and employment. In the February survey, the impact of Covid on investment was expected to ease from -6% in 2022 Q1 to -1% in 2022 Q2, and be approximately zero in 2022 Q3 (Chart 1).
Investment was expected to be around 1% higher compared with what it would have been without Covid over the medium term (2023+). Covid is also expected to lead to long-term structural changes in the economy that will affect the types of investments firms make. Firms expect to invest less in land and buildings but invest more in IT and software in future years (see Anayi et al (2021) for more details).
Chart 1: Businesses expect the impact of Covid on their sales, employment and investment to be close to zero by the second half of 2022
Expected impact of Covid on sales, employment and investment (a)
- (a) The results are based on the questions: ‘Relative to what would otherwise have happened, what is your best estimate for the impact of the spread of Covid on the sales/employment/capital expenditure of your business in each of the following periods?’. Data for 2020 Q2 are from the July 2020 DMP survey, data for 2020 Q3 are from the October 2020 DMP survey, data for 2020 Q4 are from the January DMP survey, data for 2021 Q1 are from the April 2021 DMP survey, data for 2021 Q2 are from the July 2021 survey, data for 2021 Q3 are from the October 2021 DMP survey, and data from 2021 Q4 are from the January 2022 DMP survey. Data for 2022 Q1, 2022 Q2, 2022 Q3, and 2023+ are from the February 2022 DMP survey. Data shown for 2020 Q1 are percentage changes in aggregate ONS data for private sector output and private sector employment between December 2019 and March 2020.
Working from home became much more common during the pandemic (Chart 2). In 2019, DMP respondents estimated that around 7% of the hours that their employees worked were from home (see Anayi et al (2021) for more details). In April 2020, 61% of employees were actively working (ie excluding those on furlough, who were employed but had zero hours, and those unable to work) and 36% of employees were working from home (Chart 2). During most of 2021 the percentage of employees working from home gradually declined with more people returning to business premises. However, Government guidance to work from home where possible, in response to the spread of the Omicron variant, increased the proportion of employees working from home from 25% in November to 30% over December and January. By February, as this guidance was removed, these numbers had returned to November levels, with around 24% of hours worked from home, 4% unable to work, and 72% worked on business premises. This indicates that a larger proportion of the workforce is currently working from home than was the case before the pandemic.
Looking ahead, expectations of firms in the DMP also suggest a gradual return to business premises is anticipated, but working from home remains significantly above pre-pandemic levels over the medium term, at around 17% of hours to be worked from home in 2023 and beyond. That is around two and a half times more hours worked from home than pre-pandemic.
Chart 2: People returned to office premises after Government guidance to work from home was removed in January
Percentage of employees working on business premises, working from home, and unable to work (a)
- (a) The results are based on the question ‘Approximately what percentage of your employees do you expect to fall into the following categories in each of the following periods?’. Respondents could assign their employees to the following categories: (i) Still employed but not required to work any hours (eg ‘on furlough’), (ii) Unable to work (eg due to sickness, self-isolation, childcare etc), (iii) Continuing to work on business premises, and (iv) Continuing to work from home. Firms are asked to include only employees of UK-based businesses and not from any overseas part of the group, and to treat employees working some hours as continuing to work if they have been partially furloughed. Where employees spend some time working on businesses premises and some time working from home, firms are asked to answer based on the approximate proportion of hours worked from each location.
As well as a large fall in sales, there was a sharp increase in uncertainty as the scale of the pandemic became clear. Measures of uncertainty can be constructed using year-ahead expectations data in the DMP, since the survey asks about the distribution of expectations, not just for point estimates. These represent the average standard deviations across firms of expectations for sales, employment, and price growth, respectively.
Chart 3 shows the big increase in uncertainty about both future sales and employment in Spring 2020. Sales uncertainty remained high through 2020, but has since declined. However, it still remained above its pre-pandemic level in February 2022. Employment uncertainty declined more quickly and is now only marginally above its 2019 average. Meanwhile, uncertainty about future inflation initially rose by less than sales and employment uncertainty. But it has been on an upward trend over the last year, and is currently the highest of all three measures in relation to their 2019 averages.
Chart 3: The Covid pandemic led to a large increase in uncertainty around future sales, this has since declined but still remains above pre-pandemic levels
Sales, employment, and inflation uncertainty (a)
- (a) The sales uncertainty index is constructed using the standard deviation of expected firm-level sales growth a year ahead. The employment uncertainty index is constructed using the standard deviation of expected firm-level employment growth over the next 12 months. The inflation uncertainty index is constructed using the standard deviations of expected firm-level price growth over the next 12 months. All three indices are normalised to their respective average values during 2019. A three-month moving average is then constructed to create the final series.
Output price inflation
During the first year of the Covid pandemic there was a modest fall in economy-wide price inflation reported in the DMP, similar to what was seen in aggregate CPI inflation. During 2021 inflation picked up sharply. DMP respondents reported that inflation in the prices that they charge has been increasing in recent months, reaching 5.4% on average in the three months to February 2022 (Chart 4), up from 4.9% in the three months to November 2021. This refers to prices charged by businesses across the whole economy, including businesses that sell to other businesses, rather than just by those businesses that sell directly to consumers. Realised price growth was particularly elevated in the manufacturing, wholesale and retail, and accommodation and food industries. The rise in inflation likely reflects a number of factors, including the recovery in demand, supply and labour shortages (discussed in more detail below) and higher energy prices.
As well as increases in reported inflation, expected year-ahead price inflation has also been increasing over the last year, reaching 4.8% in the three months to February 2022, up from 4.2% in the three months to November 2021 (Chart 4). This implies businesses thought that inflation is likely to remain high over the next year in recent surveys, although the expectations have fallen back a little from current levels. But as described above, uncertainty around these expectations for inflation is currently higher than normal (Chart 3). Also note that the latest data were collected up to the middle of February and so will not take account of how businesses expect prices to be affected by recent developments in Ukraine.
Chart 4: Both realised and expected price inflation have been increasing over the last year
Realised and expected annual price inflation (a)
- (a) Realised price growth results are based on the question ‘Looking back, from 12 months ago to now, what was the approximate % change in the average price you charge, considering all products and services?’. Expected price growth results are based on the question: ‘Looking ahead, from now to 12 months from now, what approximate % change in your average price would you expect in each of the following scenarios: lowest, low, middle, high and highest?’ and respondents were asked to assign a probability to each scenario. In the figure, solid lines are three-month moving averages. Dashed lines are single month data.
Supply and labour shortages
As reported in November 2021, there continues to be a strong positive relationship between both recruitment difficulties and non-labour disruptions on the one hand, and realised and expected output price growth on the other hand. The emergence of these shortages is another important feature of the recovery from the Covid pandemic.
In February, businesses estimated that around 13% of their non-labour costs had been disrupted on average, a gradual decline relative to previous months (Chart 5, left panel). These disruptions are widespread, however, with around two thirds of businesses reporting some disruption in February. The manufacturing and accommodation and food industries were most acutely affected in February, with over 20% of their non-labour costs disrupted on average.
Over the past few months, businesses have also been asked about the level of difficulty in recruiting new employees compared to normal. The results suggest that recruitment difficulties continue to be pervasive among DMP businesses. The percentage of firms finding it ‘much harder’ to recruit new employees compared to normal was 59% in the February survey, broadly in line with the levels seen since October 2021 (Chart 5, right panel). In February, businesses in the transportation and storage, wholesale and retail, and information and communications industries reported the highest levels of recruitment difficulties.
Chart 5: Supply disruptions and recruitment difficulties remain widespread
- (a) Results on availability of non-labour inputs are based on the question ‘Over the past month, has the availability of the non-labour inputs that your business uses been disrupted?’. Respondents provided a percentage impact figure.
- (b) Results on recruitment difficulties are based on the question ‘Are you finding it easier or harder than normal to recruit new employees at the moment?’. Respondents could select from one of the following options: (i) Much easier, (ii) A little easier, (iii) About normal, (iv) A little harder, (v) Much harder, (vi) Not applicable – not recruiting at the moment.
The DMP consists of the Chief Financial Officers of small, medium and large UK businesses operating in a broad range of industries.
We survey panel members to monitor developments in the UK economy and to track businesses’ views on them. This work complements the intelligence gathered by our Agents.
This note is a summary of surveys conducted with DMP members up to February 2022. The February survey was in the field between 4 and 18 February. In February, there were 9,541 panel members and we received 2,699 responses.
Further monthly data from the February survey for a limited number of DMP series was published on 3 March 2022. Aggregate level data for all survey questions are published on a quarterly basis. Data from the November to January surveys were released on 3 February. More information can also be found on the DMP website.
The panel was set up in August 2016 by the Bank of England with academics from Stanford University and the University of Nottingham. It was designed to be representative of the population of UK businesses. All results are weighted using employment data. See Bloom et al (2017) for more details.
The DMP receives funding from the Economic and Social Research Council.