Entrepreneurship boomed during the COVID-19 pandemic, according to new research by the Bank of England (BoE), bucking the typical pattern of company creation during economic crises.
This explosion in company creation helped the UK’s rapid economic recovery in the short term by creating new jobs and hiring quickly, the BOE says. However, long-term implications are less clear.
The counter-cyclical rise in company creation contrasts greatly with evidence from “nearly all recessions over the last century in the UK”. In all but two recessions in the past 100 years, company creation has fallen; the post-war recessions in 1919 and 1946 saw booms in entrepreneurship.
Simon Gray, head of business, ICAEW, says: “What the pandemic did was force people to work from home and to reconsider what their priorities were and what their future career trajectory might look like. People had time to reflect and question what they were doing and where they wanted to go next. Also, people enjoyed the flexibility of home working.”
The BoE research highlights how the response of entrepreneurs during the pandemic differed markedly from that during the global financial crisis of 2007/08, which showed declining or procyclical business creation in the UK, the US and France.
This most recent rise in entrepreneurship cannot be explained by government support policies such as furlough (coronavirus job retention scheme), eat-out-to-help-out and the bounce back loan scheme because they all required companies to have been set up before the pandemic began.
“Despite this, we observe a quick reaction by entrepreneurs in the economy responding to demand changes and increasing supply in lockdown-compliant sectors,” the report says.
Most new businesses created during the pandemic were “disproportionately” focused in the online retail sector and established by solo entrepreneurs starting their own companies, the research reveals. Online retail accounts for 20% of excess entry. Pre-pandemic, 65% of monthly company entry is attributable to solo entrepreneurs and 43% to new solo entrepreneurs; these numbers increase to 75% and 57% respectively, according to the BoE.
Despite the entrepreneurial spirit flourishing during the COVID-19 crisis, the BoE’s research found that companies created during the pandemic were more likely to be dissolved once the economy was allowed to grow again.
“We find that cohorts of firms created during the pandemic are more likely to dissolve, and changes in the composition of ownership structure, [all other things being equal], implies weaker hiring and higher dissolution rates in the long run,” the report says.
Gray agrees with this finding: “The report backs up what I’m hearing anecdotally from our members. I think the boom might be short lived. Setting up on your own is complex and fraught with uncertainty. With external pressures, including spiralling energy costs, rising inflation and the cost-of-living crisis, the security of employment and a regular salary looks increasingly attractive.”
The BoE says the report’s findings will help it understand how targeted policy interventions such as furlough affected companies’ survival, growth and employment.
Hear a panel of guests dissect the latest headlines and provide expert analysis on the top stories from across the world of business, finance and accountancy.Find out more
Stay up to date
You can receive email update from ICAEW insights either daily, weekly or monthly, subscribe to whichever works for you.Sign up
News in brief
Read ICAEW's daily summary of accountancy news from across the mainstream media and broader financing sector.See more