Pandemic triggers 50% rise in loss-making firms, study estimates

Without aid the distress rate of companies would have been 72 % higher, paper reveals

A new report estimates that there are about 50 per cent more loss-making firms in the Irish economy as a result of the pandemic.

The research by the Economic and Social Research Institute (ESRI) examined the impact of Covid -19 and the associated economic restrictions on SMEs, utilising survey data from before and during the pandemic,

It noted that the share of firms making losses and shouldering bigger debts increased sharply at the onset of the pandemic.

Indicators of financial difficulties among SMEs in 2021 were estimated to be about double those reported in 2019, it said.

Even with a strong recovery in turnover, coinciding with the lifting of restrictions, it estimated that the share of “highly distressed firms” could grow to 24 per cent by 2024, presuming none of them exit or wind up in the interim.

It cautioned that it was not forecasting that “this level of exit will occur as firms may well have options of restructuring their finances or adapting their business model that are beyond the scope of a technical simulation”.

The paper – co-authored by the ESRI economists and officials from the Department of Finance – also calculated that the share of firms making losses throughout 2020 and 2021 could have been about one-third higher if supports, including the Employment Wage Subsidy Scheme (EWSS), had not been made available by the State.

It found that companies availing of government supports peaked at about 65 per cent in the middle of 2020 when restrictions on economic activity were at their most stringent.

In the absence of the extensive Government support provided to SMEs throughout the pandemic, the distress rate of firms would have been 72 per cent higher, it said.

“While the levels of severe financial stress found in the microsimulation are considerable, counterfactual analysis finds that they would have been higher still in the absence of extensive Government supports to the SME sector. In a scenario without access to supports, the distress rate would have been seventy per cent higher during the pandemic,” the report authors say.

Supports

“We find that indicators of financial difficulties continue at sustained rates that are about double those reported in 2019,” they add.

The Government has spent more than €9.8 billion on the two main business supports – the EWSS (and its predecessor the Temporary Wage Subsidy Scheme) and the Covid Restrictions Support Scheme. Including funds allocated in Budget 2022, the total level of budgetary support made available between 2020 and 2022 to mitigate the impact of the pandemic stands at about €48 billion.

"As the paper highlights, without these supports the situation with SMEs – the backbone of our economy – would be much worse, not only at the present time but also into the future," said Minister for Finance Paschal Donohoe.

“But the paper also shows that not all firms will survive, some companies will not be able to adapt to the many social and economic changes that the pandemic has brought. The Government will need to ensure that future supports are tailored to liquidity constrained but solvent and viable firms.”