By Keith Pilbeam, Professor of International Economics and Finance at City, University of London. He’s worked for various City of London financial institutions, and is president of the International Economics and Finance Society. He is the author of two books, ‘International Finance’ (2013) and ‘Finance and Financial Markets’ (2018)
Despite the UK government lobbing billions of pounds at the problem, millions will lose their jobs and thousands of businesses will go bust. And it’s the poor and the young who will bear the brunt.
The coronavirus lockdown has had a devastating effect on the economic output of the United Kingdom, with the latest estimate being that it fell by over 20 percent in the month of April and is likely to have stabilised at around this level in May.
The UK is a heavily trade-dependent nation, and April saw export volumes fall by 17.7 percent and imports volumes decline by 26.5 percent. To avert an even worse outcome, the government has intervened on an unprecedented scale to reduce the adverse effects on the economy, companies and households.
Since the start of lockdown on March 23, the economy has been in freefall, with output plunging by 5.8 percent in March and 20.4 percent in April. Manufacturing output fell by 24.5 percent and the service sector by 19.8 percent in the same time period, but, due to the speedy emergency measures taken by the government, this has not yet been fully reflected in the unemployment figures.
The job-retention and self-employed income-support schemes, and the provision of emergency loans and tax deferments for companies has prevented an even worse outcome. The predictions are dire: a fall in GDP of 11.5 percent for 2020 and a rise in unemployment from 3.9 percent in March to in excess of 10 percent by March 2021.
Some sectors have been decimated by the lockdown and social distancing, with April figures showing widespread falls in revenue for accommodation and food services (-88.1 percent); construction (-40 percent); arts and entertainment (-39.7 percent); education (-33.4 percent); transportation and storage (-28.8 percent); wholesale, retail and motor services (-27 percent). A few other sectors have performed somewhat better, including information and communication (-13.3 percent), and financial and insurance services (-5.3 percent).
Throwing billions down the drain?
The government response has been swift and significant, with the focus being the furlough scheme, which is covering some 9.3 million employees at an estimated net cost of £39 billion. There is also a £10 billion support scheme for the self-employed. An additional £16 billion was earmarked for essential public services and £15 billion for grants and loans to businesses.
The total cost is estimated to be £103.6 billion, of which £99.3 billion is in increased government expenditure and £4.3 billion in tax cuts and concessions. The effect on the government finances will be a fiscal deficit of more than 10 percent of GDP, and the national debt rising from 80 percent to an eventual 110 percent of GDP over the next few years.
The government policy interventions will largely be financed by the new quantitative easing programme announced by the Bank of England, worth £100 billion. Although this runs the risk of causing inflation and undermining the perceived independence of the Bank, these are largely concerns for the future.
The poor and the young bear the brunt
When it comes to households, there have been noticeable differences between the better-off and the worse-off in society. Modelling work reveals that low-paid and younger workers have been the most affected, since they tend to work in sectors such as hospitality, leisure and retail, which have been most impacted by the crisis.
Data shows that the low-paid are still more likely to be furloughed than their higher-paid counterparts. The Resolution Foundation think tank reports that 27 percent of the lowest fifth in income distribution have been furloughed, while the figure for the top one fifth is only 10 percent.
Likewise, eight percent of the lowest fifth in the income distribution have been made unemployed, while the corresponding figure for the top fifth is two percent. A young-worker versus older-worker divide exists, too, with 30 percent of 18–24-year-olds furloughed and 10 percent made unemployed, while the figures for 54–59-year-olds is estimated at 17 percent and 3 percent respectively.
The Resolution Foundation also reports that one in four lower-income households have increased their use of consumer credit during the pandemic, while the corresponding figure for high-income households is one in eight.
As well as taking the biggest income hit, poorer households have substantially less savings and wealth to see them through the crisis. A typical worker in a shut-down sector of the economy and most at risk of unemployment had average savings of just £1,900, compared to £4,700 for those who have been able to work from home during the crisis.
These averages also disguise the plight of a substantial number of people who have no savings at all and already have quite high debt burdens. Three times as many adults in the top fifth of the income distribution have experienced no income hit compared to the bottom fifth.
The rich just get richer
Incredibly, because they’ve not been spending so much on travel, or out-of-house activities such as holidays and eating out, over a third of the richest fifth of the population have seen their savings increase during the crisis. This cannot be said of many of those in the bottom part of the income distribution, whose debt burden has increased and who’ve had to rely on loans and the support of family and friends to make ends meet.
The Resolution Foundation also reports that employees in the “mixed or other ethnic group” category have suffered the largest rate of job losses to date, at 12 percent, together with Asian British at 11 percent, compared to a national average of 4 percent, due to the fact these groups disproportionately worked in sectors of the economy most affected by the pandemic. Interestingly, for the black ethnic group members who predominantly work in essential services, the figure is line with the national average.
In 2018–19, the average income of UK citizens in the black ethnic group was 18 percent lower than for white people, once an allowance for benefits and taxes has been made. The pandemic will only worsen income inequality.
The government’s Office for National Statistics (ONS) reports that 40 percent of workers in the poorest fifth of households have jobs in sectors of the economy with the highest exposure to the coronavirus. People from lower-income households are also less likely to work from home, and are more likely to work in customer-facing roles that increase their risk of exposure to the virus. By comparison, only around 25 percent of the richest fifth do such work.
Another group that has been heavily impacted by the crisis is that comprising the five million self-employed, almost half of whom have lost work due to the crisis.
Britain’s not working
The labour market is exhibiting clear signs of severe distress. Her Majesty’s Revenue & Customs’ payroll data suggests that 600,000 workers have already been made redundant. Advertised vacancies have fallen from more than 800,000 in March to below 400,000 today, while the pay growth of average weekly wages, which was 2.2 percent annualised in the first three months of the year, dropped to -2.7% in the second quarter. There has been a rise of 2.5 million people claiming Universal Credit.
The future looks bleak. The casualisation and job insecurity of the workforce will increase significantly, fewer permanent jobs will be available, zero-hours contracts and work in the gig economy will become more commonplace, and more people will be forced into the vagaries of self-employment.
And the public sector will not be immune either, as the need to balance the books will force both central government and local councils to cut jobs, and to offer more jobs on a short-term and/or zero-hours-contract basis.
As the economy gradually reopens from the national lockdown, and social-distancing measures are eased, there should be a significant recovery during the July to October period. However, job losses will intensify and the hopes of policymakers for a V-shaped recovery are likely to be disappointed.
According to the ONS, companies are in worse shape today than they were in the run-up to the global financial crisis: net private non-financial profits were just above nine percent at the end of 2019, whereas they were at around 11 percent in 2008.
The end of the furlough scheme will mean that as many as 20 percent of furloughed workers or close to two million people will lose their jobs. Firms that don’t immediately go bankrupt will be reluctant to invest or hire, preferring to retain cash flow to enhance their chances of survival.
Consumers will be facing reduced real wages, greater actual or fear of unemployment, and increased debt exposure, all of which will heavily constrain consumer expenditure over the next few years.
Fears of a second or third wave of the virus, and enduring social-distancing measures will ensure that economic activity will remain significantly below the pre-pandemic level well into the latter half of 2023 and possibly beyond.
Problems will be compounded by a government that has clearly demonstrated it lacks competence and will face an urgent need to reduce the unsustainable fiscal deficit it is currently running.
It is also a government intent on a relatively hard form of Brexit that will add further significant damage to an already fragile economy. One can hope for the best, but I fear the worst and most prolonged recession in living memory is the most likely outcome.