- On 31 July the statistics office reported a second-quarter GDP fall of around 18.5%, the largest on record.
- Days earlier, the UK had imposed a quarantine on travellers arriving from Spain, more bad news for tourism.
- In a year like this, holding out depends on the patience of banks, partners and suppliers: communicate clearly before a payment is missed.
On 31 July 2020 the National Statistics Institute reported a second-quarter GDP fall of around 18.5%, the largest in the statistical series. It was the first complete figure covering the hardest months of the crisis: the lockdown, the halt in non-essential activity and the gradual reopening. The figure confirmed in official terms what many businesses already knew from their own cash position. Faced with figures like these, it is best to avoid both panic and indifference.
Days earlier, the United Kingdom had imposed a quarantine on travellers arriving from Spain, a decision that added uncertainty to a summer that was already complicated for tourism. The two pieces of news together painted a demanding picture: an economy that had just suffered a historic fall and a key sector watching one of its best sources of visitors become more difficult.
The figure
GDP is the value of everything the economy produces in a period. A contraction of that size in a single quarter reflects the effect of the lockdown and the halt in activity. It captures the hardest months of the crisis for the first time in a single quarterly figure. It should be read with care, because it refers to the economy as a whole and not to the specific situation of each company.
A figure that large does not mean every business lost the same. Some sectors suffered far more than others, and within each sector some companies had more or less capacity to adapt. What is useful about a macroeconomic figure is that it helps to put one’s own situation in context: it shows whether what one is experiencing is exceptional or similar to what is happening around, and from there to decide realistically.
More bad news for tourism
The British quarantine thus added to the fall in GDP. With British tourism halted in mid-summer, it was clear that 2020 would be decided by cash flow. British tourists are an important part of foreign visitors, and a quarantine discourages travel.
A quarantine on return weighs on the decision to book much more than any discount. Someone who has to stay at home for several days after coming back from holiday will often prefer another destination, or not to travel. For hotels, restaurants and shops that counted on that clientele, the effect was immediate, and for the economy as a whole it was a reminder of how exposed it was to decisions taken beyond its borders. Diversifying source markets reduces that risk, although it does not remove it.
The patience of banks, partners and suppliers
The figure confirmed what many companies were already living. In a year like that, the ability to hold out depends on the patience of banks, partners and suppliers. Keeping clear communication with them, explaining the situation before a payment is missed and proposing a realistic timetable is usually better than waiting for problems to worsen. Silence, by contrast, tends to be read as a sign of a bad situation.
A credible plan, with figures and dates, is the best card for asking for time. Banks and suppliers prefer a company that explains in advance that it is going through a difficulty to one that suddenly disappears. It is wise to present the situation transparently, show what measures are being taken and propose a solution both sides can meet. And it helps to have the adviser prepare those conversations.
In 2020 the game was played out in cash flow and in the confidence of those who support the company.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
