UK businesses expect a gradual recovery in sales, employment and investment during the second half of 2021 given the easing of Covid-19 (Covid) related restrictions and the reopening of the economy. Respondents to the August survey expected the impact of Covid on sales to narrow from -7% in 2021 Q3 to -4% in 2021 Q4 (Chart 1), with the impact on sales expected to be close to zero over the medium term (2022 and beyond). These expectations fell back in August to around levels reported in the June survey, following a temporary improvement in July.
The impact of Covid on investment is also expected to wane over the coming quarters, at a similar pace to the impact on sales. The impact of Covid on investment was expected to ease from -7% in 2021 Q3 to -5% in 2021 Q4, in the August survey (Chart 1). Over the medium term (2022+), investment was expected to be around 2% higher compared with what it would have been without Covid. Investment in employee training and IT and software was expected to be higher than before Covid, although businesses expect to invest less in land and buildings.
As well as sales and investment, employment is expected to recover over the rest of 2021. Covid was estimated to have lowered employment by 6% in 2021 Q3 (Chart 1). That effect was expected to decline to -4% in Q4. Expectations for the shape of the recovery in employment in the August survey were lower compared to those in the July survey, following a similar pattern to sales expectations.
Chart 1: Businesses expect the impact of Covid on their sales, employment and investment to gradually wane
Expected impact of Covid on sales, employment and investment (a)
Footnotes
- (a) The results are based on the questions: ‘Relative to what would otherwise have happened, what is your best estimate for the impact of the spread of Covid-19 on the sales/employment/capital expenditure of your business in each of the following periods?’. Data for 2020 Q2 are from the July 2020 DMP survey, data for 2020 Q3 are from the October 2020 DMP survey, data for 2020 Q4 are from the January 2021 DMP survey, data for 2021 Q1 are from the April 2021 DMP survey and data from 2021 Q2 are from the July 2021 survey. Data for 2021 Q3, 2021 Q4 and 2022+ are from the August 2021 DMP survey. Data shown for 2020 Q1 are percentage changes in aggregate ONS data for private sector output and private sector employment between December 2019 and March 2020.
As well as asking businesses about the marginal impact of Covid on their sales, the DMP also asks businesses about their expectations for overall sales growth over the next year. And rather than asking for a point estimate, the surveys asks about the distribution of expectations for year-ahead growth. This means that DMP data can also be used to assess how uncertain businesses are about the future.footnote [1]
Chart 2 shows the distribution of year-ahead sales growth expectations. The distribution has widened significantly during the pandemic. Initially, the distribution widened as businesses put more weight on the probability of sales falling over the next year (at this point the data referred to the expected change in sales between 2020 Q1 and 2021 Q1, ie a comparison relative to pre-pandemic sales). But in later periods the widening is primarily at the top of the distribution as the reference period has moved on and become a comparison of how sales are expected to recover relative to depressed levels during the Covid period. In the most recent survey, sales were expected to grow by around 12%, on average, between 2021 Q2 and 2022 Q2, but still with a wide distribution around that.
Chart 2: The distribution of expected sales growth has widened substantially using the Covid pandemic
Distribution of expected sales growth over the next year (a)
Footnotes
- (a) The results are based on the question: ‘Looking a year ahead from the first/second/third/fourth quarter of this year to the first/second/third/fourth quarter of next year, by what percentage do you expect your sales revenue to have changed in each of the following scenarios: lowest, low, middle, high and highest?’. Respondents were then asked to assign a probability to each scenario. The five scenarios for each firm in the survey are pooled together and weighted by the probability attached to them and firm size to generate the overall distribution. Monthly data collected between May and July refer to Q1 of that year, data collected between August and October refer to Q2, data collected between November and the following January refer to Q3 and data collected between February and April refer to Q4 of the previous year.
A widening in the distribution of expected outcomes implies an increase in uncertainty. Chart 3 shows a measure of the average standard deviation of expected sales growth derived from the DMP data, in the red line, which can be used to track developments in uncertainty. This measure of subjective uncertainty rose sharply at the start of pandemic. It subsequently fell gradually, but has stabilised in recent months and remains elevated relative to its pre-pandemic level. This measure of subjective uncertainty has broadly followed an alternative measure of uncertainty, shown in the blue line, that is derived from simply asking businesses whether they perceive the general uncertainty levels facing their business to be high or not. However, the simpler metric has fallen a little faster and is closer to its pre-pandemic level. The percentage of businesses who thought that uncertainty was high or very high was 47% in August, reaching its lowest level since the start of the pandemic. Covid remained the largest source of uncertainty for 25% of businesses in August, up slightly from 24% in July. Covid was in the top three sources of uncertainty for 62% of businesses in August.
Chart 3: Uncertainty remains elevated
Measures of uncertainty (a)
Footnotes
- (a) See footnote to Chart 2 for the question used to derived subjective uncertainty data. The overall uncertainty data is based on the question ‘How would you rate the overall uncertainty facing your business at the moment?’. Respondents could select one of the following options: (i) Very high – very hard to forecast future sales, (ii) High – hard to forecast future sales, (iii) Medium – future sales can be approximately forecasted, (iv) Low – future sales can be accurately forecasted, (v) Very low – future sales can be very accurately forecasted.
Furlough and working from home
The percentage of employees on full-time furlough in August was estimated to be 2%, similar to July, but much lower than earlier in the year (Chart 4). As the economy has reopened, the percentage of employees working primarily from home has gradually fallen as more employees have returned to business premises (Chart 4). The percentage of employees working from home fell in August, to 30% of the workforce, down 2 percentage points from the July survey. Businesses expected this share to fall back to 26% in September, and to 22% in 2021 Q4. Meanwhile, 66% of employees were estimated to be working on business premises in August, and this was expected to increase to 71% and 76% in September and 2021 Q4 respectively.
The share of workers that were unable to work increased slightly in August to 2.5% and had roughly doubled since June. Increased staff absences were reported in all industries, but were larger in production and consumer-facing industries, in which there is less capacity for employees to work from home when self-isolating. However, businesses expected the staff absence rate to fall to around 1% in 2021 Q4 in the August survey.
Chart 4: An increasing share of employees are returning to business premises
Work arrangements of employees (a)
Footnotes
- (a) The results are based on the question: ‘Approximately what percentage of your employees do you expect to fall into the following categories in each of the following periods?’. Respondents could assign their employees to the following categories: (i) Still employed but not required to work any hours (eg ‘on furlough’), (ii) Unable to work (eg due to sickness, self-isolation, childcare etc), (iii) Continuing to work on business premises, and (iv) Continuing to work from home.
Prices
DMP members report that inflation in the prices that they charge has been increasing in recent months, reaching 3.4% on average in the three months to August (Chart 5). This refers to prices changed by businesses across the whole economy, not just those who sell to consumers. Expected year-ahead price inflation has also been increasing, reaching 3.2% in the three months to August 2022. That implies businesses think that inflation is likely to remain elevated for at least the next year. But as is the case for sales expectations, uncertainty around these expectations for inflation is also higher than normal.
Chart 5: Both realised and expected price inflation have been increasing in recent months
Realised and expected annual price growth (a)
Footnotes
- (a) Realised price growth results are based on the question ‘Looking back, from 12 months ago to now, what was the approximate % change in the average price you charge, considering all products and services?’. Expected price growth results are based on the question: ‘Looking ahead, from now to 12 months from now, what approximate % change in your average price would you expect in each of the following scenarios?’ (lowest, low, middle, high and highest)’ and respondents were asked to assign a probability to each scenario.
Recent increases in price inflation, both realised and expected, have been larger for firms in the DMP which are in industries that primarily produce goods rather than services. That might at least partly reflect recent increases in import prices and higher costs reflecting some supply-chain disruption, as also discussed in the Agents’ summary of business conditions for 2021 Q3. Manufacturing, construction and wholesale and retail are among the sectors reporting the highest recent rises in prices, and these are the sectors that might have been most heavily affected by supply disruption. However, there has also been some increase in services price inflation in the DMP too, most notably in accommodation and food.
Methodology
The Decision Maker Panel (DMP) consists of the Chief Financial Officers of small, medium and large UK businesses operating in a broad range of industries.
We survey panel members to monitor developments in the UK economy and to track businesses’ views on them. This work complements the intelligence gathered by our Agents.
This note is a summary of surveys conducted with DMP members up to August 2021. The August survey was in the field between 7 and 21 August. In August, there were 9,346 panel members and we got 2,945 responses.
Further monthly data from the August survey for a limited number of DMP series was published on 2 September 2021. Aggregate level data for all survey questions are published on a quarterly basis. Data from the May to July surveys were released on 5 August. More information can also be found on the DMP website.
The panel was set up in August 2016 by the Bank of England and with academics from Stanford University and the University of Nottingham. It was designed to be representative of the population of UK businesses. All results are weighted using employment data. See Bloom et al (2017) for more details.
The DMP receives funding from the Economic and Social Research Council.
See Bloom et al (2020) for more details on this approach.