What has been happening to firm creation by UK region and sector?

Business creation fell across the whole of the UK during the first lockdown but boomed during the second and third. Certain regions and sectors have recovered faster than others, notably London, and wholesale and retail trade.

Over 1.4 million new businesses were registered with Companies House between the start of the first Covid-19 lockdown on 23 March 2020 and the end of July 2021. Most of these were in sectors that were able to remain open or service activities that were possible despite social distancing measures and lockdowns, such as online retail businesses, food and drink, sports equipment production and pet care. Of these new firms, 76% remained active at the end of July 2021.

Monitoring firm creation is important as it has implications for employment and productivity, which directly affect people’s livelihoods (Duncan, Leon-Ledesma, Savagar, Sedlacek, Sterk, 2020). This article analyses what has happened to firm creation in the UK economy as a whole, as well as in specific sectors and regions.

What has happened to firm creation during the pandemic?

At the beginning of the first nation-wide lockdown, there was a sharp decline in firm creation in the UK (as determined by new company incorporations registered with Companies House). But this initial sharp decline was quickly offset by a booming recovery (see Figure 1).

There were also two sharp drops at the end of 2019 and 2020, which correspond to the Christmas and New Year holiday periods. There is a clear break in trend either side of the first grey region, which corresponds to the first lockdown.

Figure 1: Seven-day rolling average of firm registrations since January 2019

Source: UK Firm Creation
Note: Shaded areas depict periods of lockdown in the UK

What has happened to firm destruction during the pandemic?

Alongside new firms being created, some companies registered at the beginning of the pandemic have been removed from the most recent Companies House register, indicating that they went out of business.

Figure 2 plots by month the number of registered firms that have been removed from the register as of the beginning of September 2021. This shows that many of the firms registered in the months immediately after 23 March 2020 are no longer on the register, whereas fewer firms that were registered more recently have been removed.

This is natural as firms added to the register more recently are much less likely to have been removed by the latest snapshot. Of firms that were registered in April 2020 (month four), 42,000 have now been removed from the register.

Figure 3 plots by month the removed companies in a month as a share of the total registrations in the same month. In March 2020 (month three), 61.3% of companies registered are not active in the latest register of September 2021.

Figure 2: Number of non-active companies

Source: UK Firm Creation
Note: Non-active firms are calculated as firms that were registered as entrants in a given month and have been removed from the register (or marked as inactive) in the latest snapshot (1 September 2021).

Figure 3: Non-active firms as a share of total registrations in a given month

Source: UK Firm Creation
Note: Non-active firms are calculated as firms that were registered as entrants in a given month and have been removed from the register (or marked as inactive) in the latest snapshot (1 September 2021). The vertical axis shows the share of non-active companies over the total companies registered in a given month.

What has happened to firm creation during the pandemic by region?

All regions in the UK followed a similar trend in firm creation during the pandemic: an initial fall in firm creation and then a booming recovery (see Figure 4). In all regions, the blue line falls below zero in weeks 15- 20, which indicates that all regions had less firm creation at the onset of the crisis than over the same period in 2019. Subsequently, the blue line and the red line remain above zero, indicating higher firm creation than in the same week in 2019.

There are three notable observations: London, Northern Ireland and Scotland. London has consistently experienced twice as much firm creation post-Covid-19 than in the 2019 baseline period. Most other regions have experienced 1.5 times their usual number of registrations. On the other hand, firm creation in Northern Ireland has fluctuated more than in other regions, regularly falling to 2019 levels. Scotland has also experienced a slower recovery than other nations and regions.

Figure 4: Ratio of company incorporations relative to the same week in 2019, by NUTS1 regions

Source: UK Firm Creation

What has happened to firm creation during the pandemic by sector?

Different sectors have been affected differently by the pandemic in terms of firm creation. Sectors that cater to changing consumer demands over the pandemic or sectors that are less affected by supply-side restrictions imposed by Covid-19 (not face-to-face) have seen more registrations.

Figure 5 plots the ratio of registrations in different sectors for each week of 2020 and 2021 relative to the same week in 2019. Among all the sectors, wholesale and retail trade had the most company registrations relative to its 2019 baseline. The types of companies within this category include online retailers, and food and beverage wholesale providers, both of which performed strongly during the pandemic. Accommodation and food services, and transportation and storage are some of the sectors that had the lowest number of registrations during the pandemic.

Figure 5: Ratio of company incorporations relative to the same week in 2019, by sectors

Source: UK Firm Creation
Note: Here we present selected sectors; calculations for all sectors, available on request

Overall, firm creation in the UK fell sharply during the initial lockdown period and recovered strongly afterwards. This is consistent with similar research reporting real-time firm creation in the United States and for OECD countries.

The initial drastic fall in firm creation is unsurprising given the severe restrictions imposed by the first lockdown, but the booming recovery is perhaps more surprising. We can go some way towards rationalising this response by looking at the sectors that recovered sharply: most cater to consumer demands over the pandemic or were more able to comply with restrictions.

The speed of the recovery in firm creation suggests a dynamic base of entrepreneurs and relative ease in setting up a business. The aggregate pattern of firm creation is also consistent with regional and industry experiences, which – regardless of region or industry – show a fall and then a recovery.

The main difference is the size of the fall and the recovery. For example, London fell modestly and recovered strongly. Similarly, wholesale and retail trade fell modestly and recovered very strongly.