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Quarterly issue 4

Companies’ post-pandemic cash reserves at record high – by the numbers

Author: ICAEW Insights

Published: 27 Nov 2020

Four charts showing the pandemic’s impact on company cash reserves. Words by David Stevenson.

The state of play

1. The COVID-19 pandemic has been economically devastating – 2020’s second-quarter real (ie inflation-adjusted) UK gross domestic product (GDP) plunged by 19.8%, the largest three-month fall since quarterly records began in 1955, according the Office of National Statistics (ONS). 

This left Britain’s economy a cumulative 21.8% smaller than at the end of last year. Although the global picture was better than in Britain, it was still extremely serious. Q2 2020 saw “unprecedented” real GDP falls in most G20 countries, says the OECD.

 

2. Because of the economic shock, businesses stopped making bets with their cash. The second quarter of 2020 saw a 26.5% fall in business investment which, apart from 2005 when the data was reclassified, was the largest quarterly drop on record. 

Looking forward, the OECD predicts global GDP will shrink by 4.5% this year before recovering by 5% in 2021. The Economist Intelligence Unit expects the global economy to recover to pre-COVID-19 levels only in 2022. So managers around the world have little incentive to start signing off on big investments any time soon. 

3. By the end of June 2020, UK “private non-financial corporations” (ie mainly the corporate sector) had accumulated – including global deposits – gross cash worth almost £900bn, equivalent to 40% of UK GDP, according to ONS figures.

Worldwide, the amount of money that companies have built up is massive, but estimates vary on the full extent. As at the end of June this year, S&P Global Market Intelligence valued cash held by US public companies at $2.54trn (£2trn), compared to $1.96trn (£1.47trn) at the end of December 2019 and $1.86trn (£1.46trn) at the end of June 2019. In Japan, stock market-listed companies held ¥506.4trn (around £3.7trn) in cash just over a year ago, the highest level on record, according to Bloomberg data reported in the Japan Times. That’s more than triple the level of March 2013. 

4. In addition to all the cash that companies were sitting on before 2020, governments have provided a huge injection of funds to avoid economic disaster. The Center for Strategic and International Studies, a US think tank, estimates that at the end of June 2020, if a 100% “fiscal cost” is attributed to loan guarantees (ie if all loan capital is taken up and governments had to foot a full default bill), G20 countries had announced total fiscal support of around $9trn, that is some 13% of last year’s GDP. More than $5trn of this has been provided for the corporate sector.

Given the fast-moving nature of the economic situation, these figures can’t be 100% accurate. There are overlaps between personal and business sectors as well as between government and central bank help. And, as CSIS economists say, “guarantee programs have reportedly faced rollout issues and uneven demand” – so not all loan programmes have yet been taken up.