Letter from Great Britain – 07-11-20

“The Financial Jigsaw” has been serialised here and now is replaced by this weekly “Letter from Great Britain.”

NOTE – If anyone would like an electronic copy of the complete book, I should be pleased to email a free PDF on request to: [email protected].

One website about the UK is always worth reading because the author, Dr Richard North, is an experienced health professional and provides useful information on a daily basis.  http://eureferendum.com/

This week we finally got to understand how the new social distancing rules are working.  I raced down to my local pub, The Sun Inn, midday last Saturday hoping that our wonderfully imaginative landlord, Mike, would come up with some acceptable arrangements that would resemble more of ‘normal’ than those predicted in the 40 page ‘guidance’ published by government recently.

My faith in Mike’s abilities did not fail and I enjoyed joining my local friends at the bar and catching up on the last three months when time seemed to stand still.  According to media reports, most people behaved responsibly and there was little for the police to report.  A few rowdy events did take place but were soon dealt with.  However it remains uncertain how many venues have opened and will remain open when government support ends.

“LONDON (Reuters) – People in England appear to have broadly behaved themselves as pubs reopened this weekend, Britain’s health minister Matt Hancock said on Sunday after the latest step towards a return to normality from the coronavirus lockdown.”

https://uk.reuters.com/article/uk-health-coronavirus-britain/health-minister-hails-responsible-behaviour-after-english-pubs-reopen-idUKKBN246099

“At the moment, with many people still worried about the risk of Covid infection and new health and safety regulations shaking up the entire consumer experience, and with consumer demand uncertain, an estimated 47% of British pubs and bars and 53% of restaurants decided not to reopen this weekend.”  https://www.bbc.co.uk/news/uk-53288388

It is possible that “ghost towns” are developing across the country as new figures show that many hospitality, leisure and retail businesses have missed out on government grants to help them tackle the Covid-19 crisis.

The figures from the Valuations Agency office show that 83,290 retail, leisure and hospitality businesses have received no grant support from government. Polling by Opinium for the ‘Bright Blue’ think tank found that more than two in five (44%) of businesses participating in the Coronavirus Job Retention Scheme reported they will have to lay off some, more or all of their furloughed staff when the scheme comes to a close at the end of October.

Wolf Richter has an article describing how these closures will rebound adversely on to their funders like private equity firms:

“PE firms make their money by stripping capital out of their portfolio companies via special dividends funded by “leveraged loans” that are piled on the restaurant chains to carry. This has left many PE-owned firms with little cash on hand and lots of debt to repay, leaving them in no position to weather even the mildest of storms, let alone a once-in-a-lifetime tempest like the Pandemic.  In the U.S., 34 PE-owned companies filed for bankruptcy between March 1 and June 14, including household names such as Neiman Marcus, J.Crew, or car-rental company Advantage.

https://wolfstreet.com/2020/07/04/as-the-biggest-restaurant-chains-in-the-uk-fall-into-bankruptcy-attention-turns-to-kkr-other-private-equity-firms-that-own-them/

Leicester city is the first to experience a ‘local lockdown’ as the virus has exploded yet again and its economy will suffer falling further behind more prosperous parts of the UK.  This is the government’s new strategy to control virus hotspots as the economy gradually opens. This is becoming common across the world as we begin to experience second order effects of the pandemic.

I am sure that there is much more to come in the next few months and our government seems to be aware of the risks because the chancellor has announced more government support for businesses and individuals this week: Here is his summer statement 2020: the chancellor’s key points at a glance:  https://www.theguardian.com/uk-news/2020/jul/08/summer-statement-2020-the-chancellors-key-points-at-a-glance

In spite of these trends there remains hope for a ‘V’ shaped recovery and the markets appear to have priced this in.  Employment figures in the coming months will be the proof everyone is looking for.  Indications in Britain are not encouraging.

Unemployment in Britain could soar to levels not seen since the 1980s unless ministers boost support for businesses struggling because of the lockdown.  New figures show 600,000 fewer people on UK payrolls. Without urgent measures, long-term unemployment looms for many; and new analysis by the House of Commons library shows that up to one million people could be added to the current jobless total of 2.8 million, unless extra support is given from August. Unemployment in the UK peaked at 3.3 million in 1984 under Margaret Thatcher. (In UK, there are 31.3 million people in work and this can be broken down by gender into 16.7 million men and 14.6 million women in work or into 22.9 million working full-time and 8.4 million working part-time. There were 26.5 million employees and 4.6 million self-employed people.)  There are also 12 million retirees, many relying on the 23 million fulltime workers to support them but a ratio of 2:1 does not compute – a story for another day.

The Treasury insists that its furlough scheme is unparalleled in any major economy. It is funding more than 9 million workers, at an estimated cost of a £14bn a month.  It is likely that at least 30% of workers’ jobs will be lost when support ends in November and thus some 6 million unemployed will result – which is almost 20% – unprecedented in a modern economy.  This is the magnitude of the crisis to be faced by our government during the rest of the year.  We hope that Boris will be making further announcements soon.

To give perspective on this for American readers, it is worth noting that UK has an approximate ratio of 1:5 to US workers and therefore UK projected unemployment is equivalent to around 30 million out of work in America.  It doesn’t look like this record will be reached as yet but there is much more bad news to come in the next month or two.

And an end-note here about Business Interruption Insurance claims that I mentioned last week, it seems a test law case in UK is due this month:

“In the UK, the Financial Conduct Authority (FCA) announced that it will seek a court declaration in order to assist with the potential and ongoing disputes over business interruption insurance written by FCA-regulated UK insurers. It will put the various policy wordings before the English courts on an agreed basis with the relevant insurers.   While the results of the test case, which will be heard in July 2020, will be legally binding on the insurers who are parties to the case, the test case will provide persuasive guidance for the interpretation of similar policy wordings and claims.”

Now that UK has left EUROPE I will comment on relevant EU – UK events as they arise:

“Michel Barnier, Europe’s top Brexit negotiator, said on 30 June there was “no way member states or the European Parliament would accept” the UK’s bid to smooth access to European markets for London’s financial district after it leaves the EU. The UK’s chief negotiator David Frost said on 2 July that there remained “significant differences” between the two sides “on a number of important issues”.

If negotiators fail to reach an agreement, City firms could lose access to the European markets overnight and find themselves unable to serve their EU clients from London.  Jon Moulton, the veteran financier who founded the private equity firm Better Capital, said that if the two sides failed to co-operate on the issue, “then regulatory warfare with unpredictable, but mostly adverse effects will be the new normal”.

https://www.fnlondon.com/articles/fears-of-a-brexit-crash-out-return-to-haunt-the-city-20200706

To be continued next week.

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Author: Austrian Peter

Peter J. Underwood is a retired international accountant and qualified humanistic counsellor living in Bruton, UK, with his wife, Yvonne. He pursued a career as an entrepreneur and business consultant, having founded several successful businesses in the UK and South Africa His latest Substack blog describes the African concept of Ubuntu - a system of localised community support using a gift economy model. View all posts by Austrian Peter