11 August 2020

Amid the gloom, there are reasons to be hopeful about the UK economy

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We’ve been warned of an impending ‘jobs bloodbath’ and a ‘tsunami of redundancies’ for some time now – and obviously these cautions need to be taken seriously. My own best guess is that a million people could soon have to find new work. However, the latest employment data suggests the chances of some pleasant surprises are also improving.

Unfortunately, some job losses are inevitable. The support to help pay the wages and other costs of workers furloughed under the Coronavirus Job Retention Scheme (CJRS) is now being scaled back and the scheme will close completely at the end of October. The statutory notice period for large-scale redundancies means that, for many, the bad news has already come.

Nonetheless, there are plenty of reasons to think that the peak in unemployment will be lower than many fear – and that the subsequent fall will be quicker.

Let’s start, though, with the latest official data, which are pretty grim. The usual measure of unemployment was still only around 1.4 million in June, or 4% of those who are ‘economically active’. However, these figures do not include the many millions who are still on furlough, or those who have already lost their job but are not currently looking for work.

Other figures are more meaningful – and more worrying. The alternative ‘claimant count’ measure – the number of people drawing Universal Credit – hit 2.7 million in July, an increase of 1.4 million since March. Experimental PAYE data suggest that the numbers in employment have fallen by around 730,000 over this period. The bulk of these losses were in April, so this is largely old news, but the pace of decline picked up again in July.

There were some glimmers of light. The number of vacancies jumped in July, albeit from a low level. The recent fall in employment also mainly reflects the fact that companies have been cutting back on hiring rather than making huge numbers of people redundant.

However, these figures are still being flattered by the government subsidies. More than 9.6 million jobs have been furloughed since the job retention scheme started. Even if two-thirds of the people covered have already returned to work, that still means that more than three million jobs are currently being protected by the CJRS.

So, how bad could it get? If two million of these people sadly lost their jobs when this support is withdrawn, the unemployment rate would jump to 10%. But I think that’s a worst case. Other economic data for June and July have generally been better than anticipated. Many forecasters – including the Bank of England – have been revising their projections for unemployment downwards. For what it is worth, I expect the headline measure to peak at around 7%.

That would clearly be a tragedy for those concerned. Nonetheless, if unemployment is capped below 10%, let alone as low as 7%, that would still be a relative success after the economy shrank by a quarter. The previous peak was 8.5% in 2011 after a much smaller fall in GDP in the wake of the global financial crisis.

What’s more, unlike in a typical recession, job losses will probably be focused on a few sectors where the constraints of social distancing are greatest. They are also most likely to hit lower-paid workers, particularly the young, and those aged 65 and above. (Indeed, this picture is already clear in the latest official data.)

Of course, this would bring its own problems in the longer term, especially if youth unemployment remains much higher. But this concentration of job losses should at least reduce the immediate impact on the rest of the economy.

Above all, it should also be temporary. The UK’s relatively flexible labour market is usually good at creating jobs to replace any that are lost. This contrasts with the eurozone, where the unemployment rate was already more than 7% before the pandemic struck.

The turmoil in the retail sector illustrates this well. Thousands of additional job losses have been announced in the last few weeks. However, despite hundreds of thousands of redundancies in this sector over the last few years, the UK as a whole began 2020 at close to full employment. Even in retail itself, sales have already recovered to within a whisker of their pre-crisis levels, and many online and out-of-town stores are actually recruiting.

This all suggests that unemployment should fall sharply again as the economy adapts to the ‘new normal’, whatever that may be. It also suggests that the government is right to end the job retention scheme.

The CJRS made sense when large parts of the economy were effectively shut down. The government was surely right to protect the incomes of those who were temporarily unable to work and to save businesses from the substantial costs involved in laying off and then having to rehire employees. This also had a positive impact on incentives at a time when the government wanted large numbers of people to stay at home to protect lives.

But things have moved on. Businesses in almost all sectors can now reopen, albeit under the constraints of social distancing. The priority has shifted towards encouraging people back to work, whether this is for their current employer or for some other business that is better able to cope with the new rules.

This upfront costs to the taxpayer of the job retention scheme (already £34 billion) are mounting too. It makes more sense to target any remaining support where it is needed most, notably on lower paid and younger workers, and on those businesses which effectively remain in lockdown.

In summary, the economy is rebounding and there is already a huge amount of policy stimulus in place, even without the CJRS. The recovery should therefore still look as much like a ‘V’ as the gradual lifting of the emergency measures allows, despite a painful bump in unemployment in the meantime.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.