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There has been an increase in the number of companies considering laying off staff and freezing wages in order to safeguard working capital over coming months, according to the latest Lloyds Business Barometer.
The Barometer from one of the UK's largest high-street lenders shows there was little evidence of a sharp rebound in business conditions or sentiment in May, despite the Government announcing the easing of some lockdown restrictions.
The May Barometer - which offers a timely snapshot of economic activity - showed the majority of firms (68%) still reported a negative demand impact from Covid-19, although it was slightly less severe than in April (74%).
In response to the likely impact on working capital, firms expressed a greater likelihood of a reduction in their staffing levels and a pay freeze in the next twelve months.
Although there were some signs of improvement in demand in the period that corresponds with the easing of the pandemic and lockdown measures, firms remained significantly negative about their business prospects for the year ahead suggesting a protracted road to recovery.
"The UK economy is gradually reopening as coronavirus lockdown restrictions are incrementally lifted, leading to optimism that the worst of the impact may be behind us. Still, many firms, for example in the hospitality sector, remain closed and those that have resumed trading are doing so while adhering to mandatory social distancing rules," said a statement from Lloyds Bank Commercial Banking.
Most firms in the survey meanwhile indicated that they were either operating at no more than half their usual capacity (41% of firms) or are not at all (17%).
The sectors with the highest share reporting a negative impact on demand from the coronavirus were hospitality (82%), construction (79%) and transport (78%), while shares in manufacturing (74%) and retail (74%) were also relatively high.
The proportion of service sector firms reporting a negative impact on demand was lower at 62%, partly reflecting more scope to work from home in financial and professional activities.
The Barometer also revealed that firms with smaller turnover were more likely to report a negative impact on demand.
For instance, 73% of firms with turnover of £5-25mn said the pandemic was having a negative impact on demand, compared with 59% of firms with turnover above £25mn.
There were however some businesses that had seen improved performance during May, with 10% of firms said that demand had actually risen due to the health crisis.
This 10% of firms were not concentrated in any particular sector in the survey and are instead fairly evenly distributed. The exception was the public sector, where 20% reported a positive demand effect.
"It suggests that a small share of firms across sectors have been able to gain market share during the health crisis," said Lloyds.
Business prospects the year ahead remained challenging according to the Barometer, despite the number of government measures to support businesses including the Job Retention Scheme, the business rates holiday and bounce-back loans.
As a result of these challenges, Lloyds report a record 44% of firms, including more than 50% in manufacturing and hospitality sectors, plan to reduce their staffing levels over the next twelve months.
15% anticipated more vacancies in their business.
Pay freezes are expected to be more widespread with 38% anticipating no wage increases in the coming year, nearly three times the proportion (14%) at the start of the year.
Businesses also indicated that their ability to raise prices in the next twelve months had fallen, with only 31% expecting higher prices compared with 40% at the start of the year, while the share preparing to lower their prices more than trebled to 17% from 5%.
"Overall, there are early signs in our survey that the worst may be behind us, as lockdown restrictions are gradually eased and firms resume trading. However, firms are under no illusions about the challenges that lie ahead. While the road to recovery has begun, it looks likely to be protracted as firms reassess supply relationships and tackle potentially permanent changes to demand. We will provide an update on the June results next month to gauge businesses’ evolving opinions and expectations, in particular whether the nascent signs of more positive sentiment gathers momentum," said Lloyds.
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