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How do firms cope with economic shocks in real time?

Categories: Office for National Statistics, Climate & sustainability, World of work, Impact, Policy, Potential

25 April 2025

How do firms cope with economic shocks in real time?

This research used data made available via the Office for National Statistics (ONS) Secure Research Service, which is being expanded and improved with ADR UK funding.

Author: Christina Palmou, Office for National Statistics (ONS), Jakob Schneebacher, Competition Markets Authority (CMA), Thiemo Fetzer, University of Warwick

Date: April 2025

Research summary

Policymakers often need to respond quickly to unexpected shocks, such as financial crises, international emergencies or natural disasters, but traditional data collection methods and research can take months or years. This project builds a new toolbox, consisting of high-frequency linked microdata, to estimate firm responses to shocks in near real-time. It thereby enables policymakers to rapidly evaluate and adjust economic policy. The research team has discussed their findings with a number of government departments and the Organisation for Economic Cooperation and Development.

Data used

The Business Insights and Conditions Survey collects real-time information on how economic challenges and other events affect approximately 39,000 UK businesses. Each wave of data covers a period of two weeks, capturing business’ views of impact on their revenue, workforce prices, trade, and business resilience.

For this project, the researchers developed a longitudinal version of the Business Insights and Conditions Survey (BICS) dataset. This is the first time BICS data has been adapted for long-term research use.

To study business closures, the researchers used the Longitudinal Business Database (LDB). LBD is an experimental dataset that links to the Interdepartmental Business Register (IDBR) and provides a long-term view of businesses. It also serves as a framework for linking other UK business data sources, using a consistent methodology.

Finally, BICS and LBD data was linked to the Annual Purchases Survey (APS). The APS collects detailed information on business expenditures, particularly on goods and services used in production.

  • Office for National Statistics, released 10 April 2024, ONS SRS Metadata Catalogue, dataset, Business Insights and Conditions Survey Wave 1-89 - UK, https://doi.org/10.57906/rar8-nk26
  • Office for National Statistics, released 14 June 2023, ONS SRS Metadata Catalogue, dataset, Annual Purchases Survey - UK, https://doi.org/10.57906/zd3q-d088
  • Office for National Statistics, released 21 September 2023, ONS SRS Metadata Catalogue, dataset, Longitudinal Business Database - UK, https://doi.org/10.57906/wf9k-8v47
  • Office for National Statistics, released 19 March 2024, ONS SRS Metadata Catalogue, dataset, Annual Business Survey - GB, https://doi.org/10.57906/ks2s-qx24
  • Office for National Statistics, released 10 January 2022, ONS SRS Metadata Catalogue, dataset, Management and Expectations Survey - Great Britain, https://doi.org/10.57906/r0kk-pb22

Methods used

This project used high-frequency data, combining the richness of survey data with the population coverage of administrative data. The study provides a detailed picture of how firms adapt to a large shock in real time. It is among the first papers to evaluate the most recent energy crisis, using an innovative proof of concept.

The researchers examined how firms responded to the UK’s energy price shock, triggered by Russia’s invasion of Ukraine. They examined changes to their outputs, pricing, inputs, processes and survival margins.

The analysis linked a firm’s energy dependence to the timing of the unexpected invasion, which triggered the price spike.

To identify causal effects of the energy price shock, the method followed a ‘shift-share identification’ strategy. This approach assessed how businesses were affected based on their energy use before the crisis. The analysis linked a firm’s energy dependence to the timing of the unexpected invasion, which caused the price spike.

The researchers estimated the model separately for firms of different employment size bands and across hundreds of industries. A clustering approach was used to classify firms into categories based on how they adjusted to the crisis across all margins.

Research findings

The findings show that, on average, firms exposed to the energy shock reduced their revenue expectations, passed on some cost increases, built up cash reserves, and faced higher debt.

There was no significant increase in the perceived risk of insolvency or in reported trading status. Energy-intensive firms increased their prices as the prices of their inputs rose.

However, firms varied in how they responded to the crisis, depending on size and industry. Small firms were found to adjust almost immediately, increasing their prices and stock levels, while large firms invested more in capital.

Looking at industry-specific responses:

  • Manufacturing firms saw a relatively muted response in pricing but large impacts on debt.  
  • Wholesalers and retail traders tended to react by adjusting prices and stock levels, but did not increase investment
  • Construction companies invested more in capital but saw no effect on prices.

The results suggested that large firms with market power may act as “shock absorbers”, meaning they only partially passed on higher costs to consumers. However, without targeted subsidies, capital investments to help the economy move away from energy-intensive production were mostly made by larger firms.

Beyond shedding light on firm adaptations to the energy crisis, the findings contribute to a growing literature on the green transition. They may help tailor support for firms in the energy transition, both in the short and longer term.

Research impact

Clean growth and decarbonising the economy form part of the government’s five missions. This research provides an evidence base for designing better policies to support the economy on the path to net zero. More broadly, it provides a blueprint for how to carry out high-quality real-time evaluation of economic shocks.

The researchers hosted a panel at the Royal Economic Society to discuss this research with experts from the Bank of England, the Department for Energy, Security and Net Zero, and the Organisation for Economic Co-operation and Development. This research has been further discussed with the Department for Business and Trade and HM Treasury.

Various shocks have hit the UK economy in the past 5 years including the pandemic, the energy crisis, and the ensuing cost of living crisis. At the time, the government swiftly developed the furlough scheme and energy support schemes to provide timely aid to households and firms.

While the schemes were successful, they were largely unconditional, trading off targeted interventions in favour of timely support. With limited fiscal resources, using real-time data to fine-tune policy decisions as a crisis unfolds could help strike a better balance between speed and precision. This approach would ensure that aid reaches those who need it most while minimising the financial burden on taxpayers.

This project adds new insights by challenging common assumptions around decarbonisation. The conventional view suggests that higher carbon prices inevitably harm businesses - leading to closures, job losses, or increased costs for consumers. However, this study questions that cause-and-effect narrative, offering a more nuanced understanding of how businesses actually respond to rising carbon costs.

The work demonstrates the importance of nuanced narratives around economic adjustment on the path to net zero, with some sectors experiencing far less resilience.

Research outputs

Publications and reports

Blogs, news posts, and videos

Presentations and awards

About the ONS Secure Research Service

The ONS Secure Research Service is an accredited trusted research environment, using the Five Safes Framework to provide secure access to de-identified, unpublished data.

If you use ONS Secure Research Service data and would like to discuss writing a future case study with us, please get in touch at IDS.Impact@ons.gov.uk. Please also report any outputs here: Outputs Reporting Form

This research is a collaboration between the Office for National Statistics, the Competition and Markets Authority and the University of Warwick.

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