Economic impact of Covid-19 less severe than expected

The Bank of England release its updated predictions for the UK economy in 2020, which reveals the economy will shrink by 9% in 2020 following the catastrophic economic disruption caused by the pandemic and subsequent period of lockdown.

This fall is far less dramatic than initially feared, the Bank having revised its estimate from a 14% fall previously.

The predictions also include 9% economic growth in 2021 and 3.5% in 2022 as lockdown measures continue to ease and people return to work. While unemployment is set to rise, the economy is predicted to return to its pre-pandemic size by the end of 2021.

One area of potential rapid recovery will come from SMEs. They make up 99.9% of private sector businesses and so their growth financially and in how many people they employ is clearly of the utmost importance to the overall health of the UK economy. Small firms already employ over 16million people in the UK and the sector before coronavirus was growing at a faster rate than the overall job market. A return to this would provide a welcome boost, says Luke Davis, CEO of IW Capital and private equity expert.

“These figures will be encouraging to many who would have feared much worse. Resilience is an important part of any business and firms that have survived this period will now be looking forward to growth and opportunity,” he says.

“We have already seen billions spent by the Government and now may be the time to take a proactive – rather than reactive – step to boost the economy back to where we were in February, and beyond.”

The small business community and its success is as important to the economy as anything else in the near future. With an economic contribution of over £2trillion, the success of the UK economy as a whole may in future hinge on the prosperity of SMEs, start-ups and high-growth firms.

“There are a fantastic range of innovative, growing SMEs that we work with which are likely to drive our private sector forward in the coming years. There are a few ways that we feel the government could encourage this.”

According to Davis, small firms are crucial in boosting economic recovery, but only if appropriately supported by the government. His policy wish list includes the following three points.

Extend tax reliefs on SME investments

“The Enterprise Investment Scheme (EIS) is one of the UK Government’s most successful initiatives in terms of driving investment into high-growth early-stage companies. It has helped produce some incredible business successes that otherwise may not have got off the ground due to the reluctance of banks to lend to these firms. Growing SMEs offer huge opportunities in terms of job creation and increasing the tax efficiencies of EIS is a certain way to increase investment into these firms, offering a part of the solution to economic problems.

“When the EIS income tax relief was extended from 20% to 30% in 2011, the amount invested in small companies through the scheme saw a tremendous jump. If the Government were to extend the scope or tax efficiencies of the scheme again, it could really help catalyse private investment – a crucial source of growth finance.”

Make the Future Fund EIS qualifying

“Extending the Future Fund to include EIS investments will open up the scheme to a whole new sector of investors and private capital; from angel investors to VCTs. This is not an insignificant amount of money that could be a big boost to companies trying to survive or grow.”

Innovation grants

“SMEs are famously more nimble and adaptable than big firms and some of the most successful private firms to come out of this arena have been at the cutting edge of innovation. This includes finance, science and engineering, and while loans are helpful, they can lead to an untenable debt burden on firms that need time to develop technology or software before going to market.”

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