COVID-19 could weaken covenants and raise taxes and inflation 

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The mallowstreet COVID concern indices are little changed since last week. Professional concern registered the highest increase of 6%, confirming that the attention of our research panel is shifting – to the economic recovery path.

No rush to get back to the office 

The expected minimum duration of the outbreak has increased again, by 11% until mid-December, perhaps reflecting the view that the coronavirus is something we have to learn to live with until an effective vaccine is found. COVID-19 is now expected to affect everyday life into the Christmas season, an unsettling thought for some.

The perception of the UK government’s response to the ongoing COVID-19 threat continues to improve – just 29% are now ‘very’ to ‘extremely’ worried about it, compared with 37% last week and 55% the week before. 

But the critics have not changed their stance, saying the current strategy of the government is unclear, the response uncoordinated and leaving too much to individuals’ discretion. Some view it as ‘touch and go’, prioritising the economy over health. Face masks are a new cause for debate – while some believe they will help the reopening of the economy, others think they will undermine consumer confidence.

To stay safe, 86% of our research panel have continued working from home. One in ten is in the office just 1-2 days a week, but no one is commuting for meetings yet. Just 4% have returned to the office environment full-time. We will track how these proportions change over the next few weeks.


There are clear ‘winners’ and ‘losers’ in the COVID-19 world 

The accelerated rise of remote working and the digital economy have clearly helped the IT and communications sectors the most, according to our research panel. Healthcare is another ‘winning’ sector as demand for COVID-19 therapeutics and vaccines is high.


On the other hand, the looming economic recession has made both individuals and companies re-evaluate their spending needs. Our survey respondents think working from home implies less need for office space – cutting down on it may become a way to reduce overhead costs. All this means that consumer discretionary, industrials, materials and real estate are the likely ‘losers’ in the COVID-19 crisis. 

As for other sectors, the outlook of our research panel remains unclear. Utilities may become ‘more significant’ over time if the UK economy wants to be more resilient, and energy has been ‘too slow’ on the transition pathway. 

Covenants have weakened since the beginning of the outbreak   

45% in our weekly survey report their sponsor covenant is weaker now compared to mid-March 2020, although not significantly. What stands out is that no one in our research panel reports a stronger covenant. Even though some sectors appear better positioned than others (see chart above), there are no ‘winners’ from a sponsor covenant perspective.


The expected duration of macro effects remains unchanged – the consequences of the COVID-19 crisis will be felt at least until November 2022 according to our research panel.


Taxes and inflation may rise 

Almost three-quarters (72%) of our respondents expect either taxes to rise or tax reliefs to be restricted to pay the COVID-19 bill. Two-thirds think inflation will also rise, as COVID-19 and resulting resilience efforts will mean fewer imports. Defaults may also reduce competition in certain sectors, which can drive prices higher. 

Interest rates, on the other hand, are expected to stay the same by our panel despite most believing that inflation will go up, as the government would struggle to repay its debt otherwise. This may be good news for the pensions industry – if interest rates rose in tandem with inflation and taxes, it would be a perfect storm.


What will the UK look like after COVID-19, and what are you most worried about? Click here to tell us in next week’s survey. 


Previous articles in this series: 


About the COVID Concern Index 

This short weekly survey helps gauge sentiment of our community on the pandemic. The results are distributed each week via the community newsletter. 

The COVID Concern Index values should be used as indication only and do not constitute advice. Their values are bound by the choices available in the survey on which they are based. 

COVID Concern Index:                                 

  • 0 = respondents are not worried at all 
  • 100 = respondents are extremely worried                     

Expected minimum duration of outbreak:                                         

  • Lowest possible value = 1 month                      
  • Highest possible value = 6 months                    

Expected minimum duration of macro effects:

A methodology change took place on 15/04/2020, affecting data from 21/04/2020 onwards. 

Prior to 15/04/2020:      

  • Lowest possible value = 3 months                     
  • Highest possible value = 12 months                 

Following 15/04/2020:  

  • Lowest possible value = 3 months                     
  • Highest possible value = 60 months                 

Concerned about the coronavirus outbreak and its macro implications? Click here to take part in the weekly COVID-19 survey.