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Deloitte: economy “put in a coma by policy”

21 April 2020: many businesses are reporting “radical and unplanned changes” against an “astonishingly weak” economic backdrop, according to a recent Deloitte broadcast. Despite this backdrop, there are positive reports of productivity increases coming through.

Speaking at the Big Four firm’s latest COVID-19 weekly webinar, Ian Stewart referenced the UK’s Office of Budget Responsibility’s (OBR) coronavirus reference scenario and stated that “perhaps 80 to 90%, of the short-term economic impact [of COVID-19] comes not from people falling ill, but rather from the disruption to economic activity associated with the public health restrictions and social distancing”.

That report forecast a 30% contraction in the UK economy so far this year and 35% in the second quarter, an outlook Stewart described as “astonishingly weak” and the sharpest downturn in 100 years.

“What the OBR makes clear is that the slowdown is different from any other,” said Stewart.” It is being caused overwhelmingly not by the disease itself, but by restrictions on movement which means this is going to be a very, very unusual slowdown. The economy has been put into a coma by policy.”
The OBR predicts that accommodation and food services will be down by 85% in the second quarter of 2020, with construction dropping by 70%. Financial and insurance services will see just a 5% negative impact, according to the report.

Respond, recover and thrive

Against such a challenging economic backdrop, Rick Cudworth, a Deloitte risk advisory partner, looked at organisational planning through the pandemic in a process he called “Modified Resilient Operations” (MRO). Its three key stages are respond, recover and thrive.

“The initial phase of the COVID-19 response has been characterised by significant changes in the way people live their lives and how operations operate, and those changes have happened in an extremely short timeframe,” said Cudworth.

Many clients have had to implement “radical and unplanned changes almost overnight” and while many businesses reported that they were now “settling into a more manageable cadence”, many were “often still fire-fighting” while recognising that “they want to get on the front foot”.

The next phase will “be more complicated with more choices” than the initial response where there was “very little time and very little choice”.

Among the core planning principles to consider are flexibility and resilience, fused with the viability and sustainability of operations.

Governments, meanwhile, will be continually reviewing their strategies as they adjusted to the latest case numbers, transmission rates and their impact on their health systems, said Cudworth.

Relax and reintroduce

As the effectiveness of various strategies become clearer, Cudworth believes governments will be flexible with the number of restrictions in force at any one time, relaxing some measures as the pandemic is brought under control, reintroducing others if the number of cases begins to rise again.

He cited the recent relaxation of restrictions in China and the beginning of that process in some parts of Europe, but also their re-imposition in Singapore and Hong Kong. 

There are three scenarios useful for planning purposes, explained Cudworth. The first – a rising peak with high levels of restrictions “similar to what we see across most of Europe and the USA today”, while the second dubbed ‘post-peak’ where some restrictions are lifted but many remain.

The third – towards recovery – is where most restrictions are lifted but some containment and contact tracing “are still very much in force”.

“It is possible we could cycle through these scenarios in the next three to 12 months, “said Cudworth, while those with a global supply chain, are “probably already having to operate on the basis of all three scenarios across their geographies right now”.

In the UK, a partial lifting of restrictions should lead organisations to consider whether they would resume onsite working with low-risk staff only, and what safety or social distancing measures might be put in place. Other considerations could include whether security and cleaning contractors will be available and if testing was key to getting workers back on site.

Understanding the situation across all key geographies will also be important, given that China is already seeing demand weakness because Europe and the US are on a different stage of the curve, he added. 

Cudworth gave the example of a client who had been so successful in implementing new ways of working with the restrictions in place. The client had seen “increased productivity in many areas” and were now seriously considering maintaining the modus operandi until they were well into the recovery stage.

Operational planning will need to be done hand-in-hand with financial planning, as many businesses will have a significantly depleted balance sheet strength compared to when they entered the crisis, said Cudworth. This will impact on their ability to deploy a response and future recovery strategies.

Organisations should also review their operating risks as “a supply or site failure could significantly exaggerate the challenges” to be faced as would any ensuing legal or regulatory investigations that may follow.

For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated coronavirus hub.