Brace yourselves for a killer second wave – Bill Jamieson

Not coronavirus this time, but a storm of business failures and debt defaults as hard-hit firms struggle on, says Bill Jamieson

Pizza Express is just one of several high street brands to announce redundancies recently (Picture: Lisa Ferguson)

A killer second wave is coming – and it is set to cause as much, if not more destruction than that of Covid-19. It is a looming tsunami of business failures and debt defaults as weakened companies struggle to cope with what is most misleadingly described as a “ a return to normal”.

Even if a second wave of the pandemic is contained, coronavirus loan defaults are the next big thing as emergency loan schemes and massive government job support begins to be scaled back. The blithe assumption is that thousands of businesses will have sufficiently recovered over the next six months to cope as the borrowing bills fall due. That is a most misleading assumption. Barely a day now passes without fresh announcements of business closures, retrenchment and scale-backs. Top high street names such as Boots, PC World, Marks & Spencer and restaurant chains such as Pizza Express have just announced fresh redundancies.

But many of the casualties fall below the radar of everyday reporting. The small and medium-sized enterprise sector (SMEs), comprises 60 per cent of private sector employment and some 50 per cent of turnover totalling £2.2 trillion a year. Despite government support, few are in any state to “bounce back” or make provision for loan repayment.

According to a recent report by the City UK and accountancy giant EY, of the £43 billion lent to business – plus the £30bn of tax deferrals – some £35bn is likely to be outstanding and unpayable at the end of the loan period. Half of this will be faced by SMEs. The businesses concerned are reckoned to employ three million and are sited mostly outside London. Scotland accounts for some 343,500 SMEs, providing an estimated 1.2 million jobs. They account for 99.3 per cent of all private sector enterprises, more than half of private sector employment and 41.5 per cent of private sector turnover.

These loans are 80 per cent government-backed, but not 100 per cent. And, as Natalie Ceeney, chairwoman of Innovate Finance, points out, despite that government backing, banks are required to pursue businesses for the full 100 per cent of the loan before they can claim the 80 per cent from the government. Over the past fortnight, she adds, banks have written off more than £7bn of debt in anticipation of their share of Covid-19 losses.

March 2021 is the critical date when tax deferrals require repayment. “Unless something changes”, she writes, “viable businesses employing millions will be forced into bankruptcy for not being able to repay their debt. A year from now, we could see the economic second wave.”

Here in Scotland neither the First Minister’s office or the wider administration lacks informed and well qualified advice on how to lift the economy. This week Economy Secretary Fiona Hyslop published responses to the Advisory Group on Economic Recovery report and the Enterprise and Skills Strategic Board report. Initial measures range from £50 million to support youth employment, apprenticeship schemes, a Transition Training Fund to support individuals facing redundancy, and (yet again) “exploring options to alleviate planning restraints” – hardly a ringing call to action.

Meanwhile, as if the exhaustive report of the Scottish Infrastructure Commission wasn’t enough and the Fraser of Allander Institute and the Benny Higgins proposals last month, plus a most helpful guide on the Scottish Parliament’s information centre website by Alison O’Connor, senior analyst, Financial Scrutiny Unit on policy options (and who’s in charge), Douglas Ross, the new leader-in-waiting for the Scottish Conservatives, has now promised a plan for the economy in the first month of his leadership. He joins a raucous and disorderly queue.

On the role of the UK government in determining the Scottish budget and borrowing powers, the Scottish Government says its role is restricted and this inhibits its ability “to effectively plan our response as our funding position is not clear until the UK Government has finalised its own funding decisions which might be too late”.

I fear the economy is going to be in need of emergency aid, not just for weeks but for 18 months ahead. I would suggest an autumn Cabinet reshuffle is in order, with greater representation of business voices and a sharper focus on the part of government ministers on the economy.