What just happened?
The economic activity in the United Kingdom and all over the world has declined drastically amid the global health emergency caused by coronavirus. Andrew Bailey, the Bank of England (BOE) governor, has stated that there would be a V-shaped recovery of the economy as Britain would bounce back faster than from the 2008 global financial crisis.[1]
What does it mean?
Sajid Javed, the former chancellor, states that the Bank of England’s V-shaped recovery prediction would be challenging and has asked banks to take on more capital to maintain lending to Britain’s coronavirus-ravaged economy to keep the credit flowing to the economy.[2] At LawMiracle, we agree with Sajid Javed as we believe that Andrew Bailey’s view on the rebound ahead is unmistakably bullish, as argued by Krishna Guha, vice-chairman of Evercore ISI.[3]
The BOE is overly optimistic in saying that there will be a faster bounce back as at least 21,000 companies have failed in March this year compared with figures recorded in 2019.[4] Furthermore, the British economy could shrink by 14% in the coming months, resulting in the deepest recession in modern history in the last 300 years.[5] Payments data suggests that household consumption had dropped 30% since the lockdown.[6] Six in ten UK firms have no more than three months of cash left.[7] Therefore, when the small businesses collapse, the unemployment rate increases, and GDP is expected to plunge by 25% in the second quarter. Thus, it is not likely that there will be a V-shaped recovery of the economy at a faster pace.[8]
How does this affect the legal industry?
Assuming that there is a V-shaped recovery as suggested by Andrew Bailey, then even if the businesses would start functioning again and law firms have increased workload, this will be for a limited period only. If the lockdown is eased quickly, then it is likely that due to a lack of vaccination for the virus, the country may be placed in lockdown again, which will have a severe impact on businesses and law firms.
It is suggested here that the V-shaped recovery is impossible, and the economy will recover slowly. Very few clients would want to incorporate new businesses, enter into new contracts, and transactional work. This is made evident by figures released by the Financial Times, which states that the number of new companies has already dropped dramatically by 23%.[9] All of these factors will significantly impact commercial law firms as they will make less money with increased costs of running operations during this period.
This leads us to discuss the notion of the ‘survival of the fittest’ in the context of law firms operating in the UK market. International and National Law firms may survive, but the pandemic may cause significant losses for smaller competitors as they would not be generating income in the lockdown. According to research by the Law Society, thousands of high street and sole practitioner firms may shut within six months as a result of the COVID-19 crisis.[10] Closing down the high street firms in the near future would result in the clients being forced to approach more prominent law firms and pay more on legal fees.
Written by Samriti Rudhra
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References:
[1] RJ Partington, ‘UK unemployment to double and economy to shrink by 14%, warns Bank of England’ (The Guardian, 7th May 2020). See Tom Braithwaite, ‘The week business waved goodbye to the V-shape recovery’ (The Financial Times, 1st May 2020).
[2] George Parker and Chris Giles, ‘Force banks to take on more capital, says Sajid Javid’ (The Financial Times, 8th May 2020).
[3] Chris Giles, ‘Economists question BOE’s overly rosy view of V-shaped recovery’ (The Financial Times, (7th May 2020).
[4] Andy Bounds, ‘Coronavirus claims thousands of UK businesses’ (The Financial Times, 19th May 2020).
[5] RJ Partington, ‘UK unemployment to double and economy to shrink by 14%, warns Bank of England’ (The Guardian, 7th May 2020).
[6] Chris Giles, ‘Economists question BOE’s overly rosy view of V-shaped recovery’ (The Financial Times, 7th May 2020).
[7] Richard Partington and Joanna Partridge, ‘Six in 10 UK firms have no more than three months of cash left’ (The Guardian, 2nd April 2020).
[8] Chris Giles, ‘Economists question BOE’s overly rosy view of V-shaped recovery’ (The Financial Times, 7th May 2020).
[9] Andy Bounds, ‘Coronavirus claims thousands of UK businesses’ (The Financial Times, 19th April 2020).
[10] Gazette reporter, ‘Many high street law firms face collapse, research suggests’ (The Law Society Gazette, 30th April 2020).
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.