A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
Governments across Europe face a hard balance between public health and economic activity as they combat a resurgence in COVID-19 cases.
Last week’s decisions by the UK illustrate those trade-offs. New restrictions will slow the pace of the recovery. Despite the opposition last week’s announcements have provoked, they may not go far enough. According to The Times last week, Chris Whitty, the chief medical officer, thinks the new restrictions will be insufficient to control the surge in cases and “tougher action is inevitable”.
Against this backdrop, and with unemployment set to rise, the chancellor of the exchequer Rishi Sunak last week announced measures to support the jobs market once the Job Retention Scheme (JRS), widely known as the furlough scheme, comes to an end on 31 October.
The JRS has significantly reduced the immediate damage to jobs from the lockdown. The scheme has supported over nine million jobs, or nearly 30% of the workforce. Unemployment currently stands at 4.1%, just 0.3% above the 45-year low reached in February. This is remarkably low given that the economy shrank by a quarter during lockdown, and GDP is still 12% below pre-crisis levels in July.
With the JRS, which still covers an estimated three to four million workers, ending next month a more limited wage subsidy scheme will take its place.
Starting on 1 November and lasting for six months, the government will top up salaries for workers that firms cannot take back on a full-time basis. Employees must work at least one-third of their normal hours. For the remaining hours not worked, the government and employer will each pay a third of the wages. An employee working one-third of a normal week would receive 77% of their usual pay, with the employers contributing 55% and the government 22%. (Thus employers will pay for more hours than the employee works. Critics observe that it would be cheaper for an employer to pay one full-time employee without subsidy rather than have three each working one third of a full-time job, which would cost them 165% of a full-time salary).
Companies will also be able to claim the previously announced £1,000 bonus for employers who bring employees back from furlough and keep them employed until next January.
The new scheme is far less costly than the JRS, with the government paying a maximum of 22% per employee rather than an initial 80%, declining to 60% in October, paid by the JRS. The Financial Times estimates that the cost of the new scheme will be roughly a quarter of the JRS.
Even with these new measures, unemployment is likely to rise sharply in the coming months. Last month the Bank of England forecast that the unemployment rate would reach 7.5% by the end of the year, before falling gradually to 4.7% in 2022.
An unemployment rate of 7.5% would be the highest for seven years. But given the historic contraction in UK GDP, one might have expected a worse outcome. If the Bank’s forecast is correct 7.5% would constitute the lowest cyclical peak in unemployment in any recession since the 1970s. The unemployment rate reached 8.5% following the global financial crisis in 2011 and almost 11% in the recession of the early 1990s.
There are a number of reasons why, despite the deepest decline in activity in centuries, unemployment may not reach the levels seen in previous recessions.
The first is the speed and scale of the government’s response. The government acted quickly to guarantee workers’ incomes, preventing an initial surge in unemployment. Unemployment tends to fall more slowly than it rises and slowing the initial spike should help push down the peak. The JRS scheme has helped maintain the link between employer and employee, avoiding the friction and inefficiencies created when firms have to make redundancies and subsequently hire staff once demand picks up.
Second, businesses have had better access to credit in this recession than earlier ones. Government guaranteed lending schemes have helped companies to access cash. Corporate borrowing soared in the second quarter as banks served as the primary channel for much of the extra business support provided by governments. In 2008–09 the withdrawal of credit from the economy by banks reinforced the downturn. Ten years of regulation and reform has created a more resilient banking system, one that has played a major role in countering the downturn and limiting unemployment.
The third factor is the continued growth in employment in the public sector, grocery and online retail. Public sector employment rose by 270,000 in the second quarter from the first, and has increased by 7.0% on a year earlier. Amazon and supermarkets needed to hire on a significant scale to cope with increased demand.
The fourth factor is the supply of labour. For much of the last 20 years the UK has seen strong rates of inward migration which have been a major driver of the growth in labour supply. Now, with the pandemic and Brexit, the foreign-born workforce is shrinking. The number of foreign workers in the UK fell by 9.0% in the second quarter on a year earlier. A sustained reduction in labour supply through this channel would tend to lower the unemployment rate.
None of this should detract from what is a bleak jobs picture. The unemployment rate is set to rise sharply. But with luck it will not exceed the levels seen in recent recessions.