Business Destruction and COVID-19

The question of how the COVID-19 pandemic and the fitful economic recovery that seems likely to follow in its wake will impact small business is of great importance to British Columbia. Although BC has done a good job containing COVID-19, the province’s economy has been devastated by the pandemic and the measures taken to control it. For 2020, the Business Council of BC forecasts that BC’S real GDP will contract by almost 8%, which is far greater than the GDP declines experienced in previous recessions. As of mid-june, BC is down 350,000 jobs compared to February – a catastrophic fall in employment. While the worst of the COVID-19 economic downturn may be over by the time summer arrives, the consequences of sharp declines in GDP, employment and business activity since early 2020 are expected to be felt for years to come. And there are plenty of businesses in British Columbia whose survival is in doubt.

Some idea of how the carnage associated with the COVID-19 recession may play out across the private sector can be gleaned by looking at the distribution of BC businesses and employment by industry. We are particularly struck by the concentration of jobs in industry sectors heavily affected by COVID-19.

The BC government estimates there are 517,100

“businesses” in the province. Of these, 315,000 consist of self-employed individuals with no paid staff, a group we do not consider here. That leaves about 200,000 BC firms that have paid employees. The vast majority of these are either “micro” businesses with 1-4 employees or “very small” firms with 5-9 employees (see

Table 1). Only 8,400 BC firms have 50 or more staff.

Small businesses are common in all parts of our economy. Many are found in professional and business services, retail trade, finance and real estate, accommodation and foodservices, and “other services” – all sectors that have been hit by a combination of full or partial business closures, the virtual cessation of travel, and falling consumer and business spending during the past few months. Other sectors with sizable numbers of small firms have also been affected – e.g., transportation; information, culture and recreation; and “non-essential” segments of health and social services.

For many BC businesses, the “new normal” is certain to translate into less overall revenue and a rise in fixed costs per revenue dollar. Some businesses may also incur higher variable costs – for example, the cost of additional personnel for security and cleaning, and for purchasing extra cleaning and sanitation supplies.

Looking ahead, we suspect that a significant number of BC businesses that existed when the year began will be gone by the end of

2021. Some have disappeared already, unable to survive the economic closures in place from mid-march to May. Many more will soon discover that while they are now able to do business, they cannot operate profitably in the “new normal.” The facts that international tourism has collapsed and isn’t likely to return soon, that the number of international students in BC is expected to shrivel in the near-term, and that the COVID-19 crisis is accelerating the rise of e-commerce and hastening the decline of traditional brick-and-mortar retail will also weigh on the survival prospects of quite a few BC companies. Nor should one ignore the painful consequences of the worst global economic slump since the 1930s for exportoriented BC companies in the natural resources, manufacturing and tradeable services sectors. Add it all up, and it’s likely that at least 10% and perhaps as many as 15% of the 200,000 BC businesses with paid employees could be gone by late 2021.

In the post COVID-19 context, we expect a couple of years of both rising business exits and sluggish business formation. Thus, the actual number of operating firms will decrease. The impact of a shrinking business sector will not be limited to business owners/operators. Fewer firms also mean fewer jobs for BC workers, less vibrant communities, and greater economic hardship for families and individuals across the province.