Covid-19 has had an asymmetric effect on companies, with those sectors involving the most social contact the hardest hit. It has also had a sizeable impact on where people work and how they shop. Working from home and the proportion of sales made online both increased sharply during the pandemic. This column uses data from the Decision Maker Panel to assess firms’ expectations as they look at the medium term beyond Covid-19.
Established in 2016, the Decision Maker Panel is a large and representative online panel of around 3,000 UK firms. In previous posts we have used the Decision Maker Panel to look at a number of aspects of the pandemic such as the initial impact on firms (Bloom et al. 2020), the effects on uncertainty (Altig et al. 2020), the implications for productivity (Bloom et al. 2021) and labour market reallocation (Anayi et al. 2021).
In this column on structural change, we draw on Decision Maker Panel questions on the expected medium-term impact of Covid-19 on sales, plans for working from home, and online sales beyond 2022, and new questions on investment types and use of different types of space. By looking across these dimensions jointly, we can get insights into the extent to which these changes may persist in the medium term, and also on the interactions between them.
We draw out four key results on the medium-term effects of the pandemic.
Covid-19 is expected to have only a small medium-term impact on sales, on average, but firms in industries where it is easier to work from home and those based outside large cities are expected to do better.
On average, UK firms expect Covid-19 to have a relatively small effect on sales, of around -1% over the medium term (defined as 2022+). But there are expected to be winners and losers among them. In particular, sales are expected to be higher post-2022 in industries where it is easier for people to work from home (Figure 1). These are typically industries that involve less face-to-face contact and which have been less affected by the pandemic. By contrast, regression analysis (not shown here) indicates that pre-COVID-19 dependence on online sales appears less important in explaining these medium-term effects.
Firms based outside large cities also expect to do better (Figure 2), which may be an indirect effect of increased working from home, as demand (for retail or recreational services, for instance) shifts away from city centres towards more suburban locations (as estimated by De Fraja et al. 2021).
Figure 1 Medium-term impact of Covid-19 on sales and percentage of jobs that can be done from home, by industry
Notes: 1 digit industry data. Data on percentage of jobs that can be done from home are from Dingel and Neiman (2020).
Figure 2 Medium-term impact of Covid-19 on sales and employment, by HQ location
Notes: Using data on the locations of firms’ headquarters is an imperfect proxy for where firms’ sales occur. To mitigate that, we exclude firms with over 250 employees from this chart because these larger firms are more likely to operate across wider areas.
Firms expect more working from home and greater online sales to persist in the medium term…
In 2019, Decision Maker Panel respondents estimated that around 7% of the hours that their employees worked were from home. At the height of the pandemic, this share was as high as 60% when large parts of the economy were closed and the government advised people to work from home unless absolutely necessary (Figure 3).
The proportion of hours worked from home has been gradually falling as the economy reopened and government guidance changed. In September, 27% of hours were estimated to be worked from home. Over the medium term (2022+), around 20% of hours are expected to be done from home, still a three-fold increase relative to before the pandemic.
Consistent with this, around 70% of firms expect more remote working over the medium term relative to in 2019. The extent of the expected increase in remote working varies across firms, although most expect to adopt a hybrid model, with some hours done at home and some on business premises.
Trends in online sales follow a similar (but more modest) pattern, with some increase in the share of sales being made online during the pandemic, some of which is expected to persist over the medium term (Figure 3). Just over a third of firms expect to sell more online than they did pre-pandemic. This is a significant share but affects only around half as many firms as the increase in working from home.
Figure 3 Full-time days worked from home and sales made online
Notes: Solid lines and markers represent data points. Dotted lines are interpolations between data points.
Figure 4 Medium-term impact of Covid-19 on use of space
Notes: In 2019, respondents estimated that office space accounted for 39% of the total space they used (in terms of square footage), retail space 15%, factory space 16%, storage space 16% and other space 15%.
…driving changes in their need for space, in particular reduced office space and some increase in storage space…
Related to these changes, firms expect to change their use of space beyond 2022. Most notably, the expected use of office space is expected to fall (in terms of square footage) by 9% (Figure 4). Use of retail space is expected to be around 1% lower, with storage space increasing by around 2%. Regression analysis suggests this is likely to be driven by the shift towards more online sales in the medium term, following firms’ improvements in their e-commerce capability during Covid-19, and as more people continue to shop online even as the economy recovers.
Ad-hoc comments in the survey by panel members suggest that some firms would like to make larger changes to how they use space by the 2022+ horizon but are constrained by existing lease arrangements. So these changes could be even larger over the longer term, once those leases expire.
…and also driving changes in what they invest in, with increased working from home and online sales leading to more investment in IT and training, and less investment in land and buildings.
These changes in where people work and how they shop will change what companies invest in. In particular, companies expect to increase spending on employee training and IT by around 6%. Investment in land and buildings is expected to fall by around 4% (Figure 5). Taken with a small increase in machinery and equipment and a modest rise in R&D, total investment is expected to increase by around 1.5%.
Looking across firms, those that expect larger increases in remote working and online sales also expect to invest more in IT and software. More remote working is also associated with less use of office space and lower investment in land and buildings (Figure 6).
Bringing this together using firm-level regressions, we find that for every 10% of extra hours worked from home, 3.1% less office space is expected to be used and land and building investment will be 2.1% lower. That accounts for most of the expected fall in land and buildings investment.
Every 10% of extra hours worked from home is also associated with 0.5% more IT investment. For every 10% of extra sales that are expected to be made online, IT investment will be 1.9% higher and storage space use will increase by 0.7%.
Figure 5 Medium-term impact of Covid-19 on different types of investment
Note: In 2019, respondents estimated that land and buildings accounted for 18% of total spending on these items, research and development 11%, machinery and equipment 29%, employee training 10% and IT and software 33%.
Figure 6 Medium-term impact of Covid-19 on use of office space and different types of investment by expected change in working from home
Covid-19 has led to unprecedented changes in where people work and how they shop. Some of these changes may be structural and persist in the medium term. We use data from the Decision Maker Panel survey of UK firms to assess what the effects of some of these changes might be.
In the medium term, Covid-19 is expected to lead to more hours being worked from home and more sales made online relative to pre-pandemic times. That will change how firms use space. In particular, firms are planning to use less office space and invest less in buildings. More remote working and online sales will boost investment in IT and software.
This change in the mix of investment could provide a small boost to productivity, although the effect will take time to build.
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