Tuesday 28 September 2021 6:45 am

Shortages are a devilish dance with Covid and Brexit

Fraser Ritson is a restructuring partner at Addleshaw Goddard

There’s an old cartoon that has Satan outside a church, crying. A passer-by asks him what’s wrong and he responds “They blame me for everything in there!”. For the past 18 months, Covid has been the folk devil of almost every business issue. Look at what’s happening now, with fears of a further “winter of discontent” complete with a fuel crisis, the possibility of food shortages in shops and the potential for increased restrictions.

There is no question the pandemic has caused disruption in many sectors, but as we start to emerge from the worst of it, the danger has not passed. What if business problems are being caused by something else entirely?

Outside of the immediate crises, the construction industry provides an excellent illustration of the problem. It would be facile to imagine Covid has had no impact on the sector, but reality is more complex. No one denies costs have soared.

One effect of the pandemic was a reassessment of work/life balances and greater demand for outside space. Combined with the stamp-duty holiday, this fuelled price rises, triggering increased house-building demand. At the same time, a boom in home-improvement, as people were stuck at home, meant demand for materials spiked. And all this happened against a backdrop of numerous infrastructure projects, and Covid-inspired supply-chain issues. Materials costs rocketed. Merchants rationed supplies. Delays lengthened. And construction sector output sank 1.6 per cent in July – the fourth consecutive quarter of falls.

But this is only half the story. Another issue was Brexit. A 2010 study estimated 64 per cent of building materials were EU imports. Border friction – increased customs checks and duties – also exacerbated delays and shortages, hurting supplies and making costs shoot up.  Then there were skills shortages. From January, the points-based immigration system made it vastly more difficult to get construction workers to the UK, with red-tape demands and a cost of £10k per person. This wasn’t limited to construction staff. According to the Road Haulage Association, the UK lost 15,000 European lorry drivers.

These challenges are hardly unique, as almost every sector has been hit by supply chain issues. Economists are united in believing Brexit will negatively affect UK-EU trade. One concern is that when Covid recedes, Brexit problems won’t. But what if the problem is deeper still? What if Covid was actually masking the effects of Brexit?

Another industry that relies heavily on EU labour is hospitality. A 2017 KPMG survey of the British Hospitality Association suggested up to a quarter of all UK hospitality workers were EU nationals. In London and the South East this reportedly rises to over half, leading to fears of chronic staffing issues. Food and drink imports, as with building materials, have been hit hard. But the pandemic, ironically, might actually have helped in the short term. Quite simply, no one was going out. Staff shortages were nowhere near as much an issue. But with venues facing staffing shortfalls of up to 25 per cent just as they are starting to fully reopen, hospitality may find an economic recovery poses challenges of its own.

Finally, there is the cloaking effect of stimulus packages. Certain industry sectors will face headwinds due to over- or under-trading – that are currently hidden by the government’s support schemes and the nature of cheap debt. Once this support tapers off, these debts will need repaying. Businesses which have taken advantage of generous HMRC tax breaks – such as time-to-pay arrangements, business rates relief and VAT deferrals – will need to start reintroducing those liabilities into their cashflow forecasting. Forecasters who raised concerns last March that government support might mean an explosion of ‘zombie companies’ were dismissed as doom-mongering Cassandras; it’s probably worth remembering that Cassandra always spoke the truth.

Many companies are currently looking to restructure to best fit the new normal – and take advantage of an anticipated recovery. Others are simply fighting to stay afloat. In order to survive, let alone thrive, businesses need to be ruthlessly honest about what is causing their current headaches. After all, if you’re going to take on the Devil, it’s worth making sure you’re fighting the right one.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.