Will COVID-19 deliver a boost to business dynamism?

by Tera Allas May. 04, 2021 160 views

So far, the feared bankruptcies due to the global pandemic have not materialised. In the UK, as in many other countries, governments and banks have supported business cash flows and continuity, both directly and by providing income to furloughed workers.

The data shown in the chart above illustrates that both new business births, as well as deaths, are quite seasonal. Many more businesses are typically registered and removed from business registers in the first quarter of each year. (For some reason, it happened to be the second quarter in 2019, but the longer-term data points to a first-quarter effect.) This volatility makes year-on-year comparisons quite challenging.

Overall, however, it's clear that there was a big slump in business births in most sectors in 2020 after the pandemic gathered pace. Business births in the first quarter of 2021 look very high in comparison. For most sectors, they are also higher than in the first quarter of 2020 and 2019. This is perhaps to be expected: COVID-19 has forced the reinvention of many business models, and, in particular, accelerated online delivery of all kinds.

However, after such an enormous economic shock, one would also expect a raft of business failures. For now, it looks like this effect has been delayed. Compared to the first quarter of 2020 and 2019, there has been an increase in business deaths (or, as measured here, removals from various registers) only in a couple of sectors, namely transportation and storage, ICT and administrative and support services. Put together, these sectors employ relatively few people.

As the pandemic evolves and, at some point, government support schemes get withdrawn, it is likely that some businesses that are currently trading will end up in liquidation. However, this may not spell enormous losses for the economy as a whole, if more businesses are created at the same, or even faster, pace. Clearly, there are significant transition costs, and aggregate figures hide the significant individual losses that go with business failure.

It is therefore plausible that, in the medium term, the pandemic will have acted as a source of "creative destruction", allowing the economy to move onto a new and different growth path faster than otherwise would have been the case. But it is much too early to tell.

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