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Two years on, how has the pandemic affected businesses in the UK?

The past two years have been very challenging for UK businesses. Even as lockdown measures ease and consumer demand recovers, surging inflation, labour shortages and uncertainty about future sales present several obstacles ahead.

Covid-19 has had a significant impact on UK businesses. Two years on from the start of the pandemic, this article takes stock of how businesses were affected, the extent to which things have recovered and where the effects of Covid-19 are still being felt. It uses data from the Decision Maker Panel (DMP), which is a monthly survey of around 3,000 chief financial officers of small, medium and large firms in the UK.

What has been the impact of Covid-19 on sales, employment and investment?

The spread of Covid-19 and measures to contain it led to a large fall in sales. Looking back, between April and June 2020 (Q2) businesses estimated that their sales were around 30% lower than they otherwise would have been (see Figure 1). Crucially, this was when the UK was in its first country-wide lockdown.

Sales have recovered gradually since then. But there have been further, smaller dips, including in the first quarter of 2021, when the country was again subject to restrictions introduced to contain the Delta variant, and again more recently, as a consequence of the Omicron wave.

The estimated impact of Covid-19 on sales worsened from -4% in 2021Q3 to -6% in 2021Q4 and -7% in 2022Q1.This is likely to be related to the effects of the Omicron variant. But this was a somewhat small change relative to the effects on sales seen earlier in the crisis.

The pandemic has not affected all firms and industries equally. Industries that rely on personal interactions or travel, such as airlines or hotels, have been hit hardest. Indeed, the estimated falls in sales in the early part of the pandemic were largest in accommodation and food and recreational services. These industries continue to be among the most affected in the latest data (Anayi et al, 2021).

Looking ahead, respondents to the February 2022 DMP survey expect the effects of Covid-19 on sales to continue to ease during 2022. The group expect sales growth to go from -7% in 2022Q1 to -4% in 2022Q2 and move up to approximately 0% by 2022Q3. Beyond this, they expect the impact to rise to around 1% over the medium term (2023 and beyond).

This represents only a slightly slower recovery compared with firms’ pre-Omicron expectations. This is most likely to be the case as the new variant was revealed to be milder than originally expected, requiring less stringent containment measures.

By the second half of next year, UK businesses expect Covid-19 to be having little effect on their sales, on average. But within these figures, around 15% of firms expect sales to be higher than they would have been otherwise, with 20% predicting sales will be lower.

There was also a large fall in employment during the pandemic. Employment is estimated to have fallen more slowly than sales, with the impact of Covid-19 estimated to have peaked at -9% in 2020Q3. Falls in employment were smaller than those in sales, in large part due to government support programmes, such as the Coronavirus Job Retention Scheme (CJRS) which at its peak protected almost nine million jobs.

The proportion of employees on furlough gradually declined after February 2021, and the CJRS officially ended in September 2021 (see Figure 2). In the February 2022 DMP survey, the impact of Covid-19 on employment in 2022Q1 was estimated to be -4%, marginally worse than in 2021Q4 (see Figure 1). The effect was expected to ease to -2% in 2022Q2, and -1% by 2022Q3.

Lastly, Covid-19 has also led to a large fall in investment. This fell initially by more than sales in the early part of the pandemic and remained weaker until the end of 2021. But it appears to have been less affected by the Omicron variant compared with sales. In 2022Q1, the impact of Covid-19 on investment was estimated to be -6%, compared with -7% for sales.

The effects on investment are also expected to wane over the coming quarters, and at a slightly faster pace than for both sales and employment. In the February 2022 DMP survey, the impact of the pandemic on investment was expected to ease from -6% in 2022Q1 to -1% in 2022Q2 and be approximately zero in 2022Q3 (see Figure 1).

Investment was expected to be around 1% higher compared with what it would have been without Covid-19 over the medium term (beyond 2023). The pandemic is also expected to lead to long-term structural changes in the economy that will affect the types of investments firms make. For example, firms are expected to invest less in land and buildings but more in information technologies and software in future years (Anayi et al, 2021).

Figure 1: Expected impact of Covid-19 on sales, employment and investment

Source: DMP
Note: (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 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 DMP survey, data for 2021 Q1 are from the April 2021 DMP survey, data for 2021 Q2 are from the July 2021 survey, data for 2021 Q3 are from the October 2021 DMP survey, and data from 2021 Q4 are from the January 2022 DMP survey. Data for 2022 Q1, 2022 Q2, 2022 Q3, and 2023+ are from the February 2022 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.

What about working arrangements?

Working from home became much more common during the pandemic (see Figure 2). In 2019, DMP respondents estimated that around 7% of the hours that their employees worked were done so from home (Anayi et al, 2021).

In April 2020, just under two-thirds (61%) of employees were actively working (that is, excluding those on furlough, those who were employed but had zero hours, and those unable to work). More than a third (36%) of employees were working from home (see Figure 2).

During most of 2021, the proportion of employees working from home gradually declined with more people returning to business premises. But government guidance to work from home where possible in response to the spread of the Omicron variant increased the proportion of employees working from home from 25% in November 2021 to 30% in December 2021 and January 2022.

By February 2022, as this guidance was removed, the numbers had returned to November 2021 levels. By this stage, around 24% of people were working from home, 4% were unable to work and 72% were working on business premises. This indicates that a larger proportion of the workforce is currently working from home than was the case before the pandemic.

Looking ahead, firms’ responses to the DMP also suggest a gradual return to business premises is anticipated. Nevertheless, working from home is predicted to remain significantly above pre-pandemic levels over the medium term, with around 17% of hours to be worked from home in 2023 and beyond. That is around two and a half times more than before the pandemic.

Figure 2: Percentage of employees working on business premises, working from home and unable to work

Source: DMP
Note: (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. Firms are asked to include only employees of UK-based businesses and not from any overseas part of the group, and to treat employees working some hours as continuing to work if they have been partially furloughed. Where employees spend some time working on businesses premises and some time working from home, firms are asked to answer based on the approximate proportion of hours worked from each location. Not all bars sum exactly to 100 exactly due to rounding.

How has business uncertainty evolved over the past two years?

As well as a large fall in sales, there was a sharp increase in uncertainty as the scale of the pandemic became clear during early 2020. Measures of uncertainty can be constructed using year-ahead expectations data in the DMP (since the survey asks about the distribution of expectations, not just for point estimates).

Figure 3 shows a big increase in uncertainty about both future sales and employment in the spring of 2020. Sales uncertainty remained high throughout 2020 but has since declined. Even in February 2022, it remains above pre-pandemic levels.

Employment uncertainty declined more quickly and is now only marginally above its 2019 average. Meanwhile, uncertainty about future inflation initially rose by less than sales and employment uncertainty. But it has been on an upward trend over the last year and is currently the highest of all three measures in relation to their 2019 averages.

Figure 3: Sales, employment and inflation uncertainty

Source: DMP
Note: : (a) The sales uncertainty index is constructed using the standard deviation of expected firm-level sales growth a year ahead. The employment uncertainty index is constructed using the standard deviation of expected firm-level employment growth over the next 12 months. The inflation uncertainty index is constructed using the standard deviations of expected firm-level price growth over the next 12 months. All three indices are normalised to their respective average values during 2019. A three-month moving average is then constructed to create the final series.

What about inflation?

During the first year of the pandemic, there was a modest fall in economy-wide price inflation reported in the DMP. This was similar to what was seen in aggregate consumer price index (CPI) inflation.

During 2021, inflation picked up sharply. DMP respondents reported that inflation in the prices that they charge has been increasing in recent months, reaching 5.4% on average in the three months to February 2022 (see Figure 4). This is up from 4.9% in the three months to November 2021.

These figures refer to prices charged by businesses across the whole economy, including businesses that sell to other businesses (rather than just by those businesses that sell directly to consumers). Price growth was particularly elevated in the manufacturing, wholesale and retail sectors, as well as in accommodation and food industries.

The rise in inflation is likely to reflect a number of factors, including the recovery in demand, supply and labour shortages, and higher energy prices.

As well as increases in reported inflation, expected year-ahead price inflation has also been increasing over the last year. It reached 4.8% in the three months to February 2022, up from 4.2% in the three months to November 2021 (see Figure 4).

This implies that businesses believe that inflation is likely to remain high over the next year, although the expectations have fallen back a little from current levels. But as described above, uncertainty around these expectations for inflation is currently higher than normal.

It should also be noted that the latest data were collected up to the middle of February 2022 and so will not take account of how businesses expect prices to be affected by the war in Ukraine.

Figure 4: Realised and expected annual price inflation

Source: DMP
Note: (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.

How have supply and labour shortages affected UK businesses?

As reported in November 2021, there continues to be a strong positive relationship between both recruitment difficulties and non-labour disruptions (such as supply chain delays and shortages of raw materials) on the one hand, and realised and expected output price growth on the other. The emergence of these shortages is another important feature of the post-pandemic recovery challenge.

In February 2022, businesses estimated that around 13% of their non-labour costs had been disrupted on average, a gradual decline relative to previous months (see Figure 5, panel A). These disruptions are widespread, with around two-thirds of businesses reporting some disruption in February. Manufacturing and accommodation and food industries were most acutely affected, with over 20% of their non-labour costs disrupted.

Over the past few months, businesses have also been asked about the level of difficulty in recruiting new employees. The results suggest that recruitment difficulties continue to be pervasive among businesses in the DMP. Over half (59%) of firms report finding it ‘much harder’ to recruit new employees compared with normal times. This figure is broadly in line with the levels seen since October 2021 (see Figure 5, panel B).

Businesses in the transport and storage, wholesale and retail, and information and communications industries report the highest levels of recruitment difficulties.

Figure 5: Percentage of non-labour inputs disrupted (panel A) and percentage of businesses currently finding it much harder than normal to recruit (panel B)

Panel A

Panel B

Source: DMP
Note: (a) Results on availability of non-labour inputs are based on the question ‘Over the past month, has the availability of the non-labour inputs that your business uses been disrupted?’. Respondents provided a percentage impact figure. (b) Results on recruitment difficulties are based on the question ‘Are you finding it easier or harder than normal to recruit new employees at the moment?’. Respondents could select from one of the following options: (i) Much easier, (ii) A little easier, (iii) About normal, (iv) A little harder, (v) Much harder, (vi) Not applicable – not recruiting at the moment.


Covid-19 has had a significant impact on UK firms, affecting almost every aspect of everyday business. This article analyses the main developments over the past two years using data from the monthly Decision Maker Panel survey.

The sharp drops in sales, employment and investment experienced in 2020 have now waned. Nevertheless, risks remain, mainly around higher price growth, elevated uncertainty and persistent supply disruptions.

In addition, structural changes are also expected across UK firms, with working from home remaining much more common than before the pandemic.

Where can I find out more?

Who are experts on this question?

  • Lena Anayi
  • Nicholas Bloom
  • Paul Mizen
  • Gregory Thwaites
Authors: Paul Mizen, Philip Bunn, Ivan Yotzov, Lena Anayi, Nicholas Bloom and Gregory Thwaites
Picture by Nito100 on iStock
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