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Despite the UK government lobbing billions of pounds at the problem, millions will lose their jobs and thousands of businesses will go bust. And the poor and the young 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 has fallen by over 20% in the month of April and it 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% and imports volumes decline by 26.5%. To avert an even worse outcome, the UK government has intervened on an unprecedented scale to reduce the adverse effects on the economy, companies and households.
Since the commencement of lockdown on the 23rd of March, the economy has been in freefall with output plunging by 5.8% in March and 20.4% in April. Manufacturing output fell by 24.5% and the service sector by 19.8%, however, due to the speedy emergency measures taken by the government this has not yet been fully reflected in the unemployment figures.
The Job Retention Scheme, 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% for 2020 and a rise in unemployment from 3.9% in March to in excess of 10% by March 2021.
Some sectors have been decimated by the lockdown and social distancing with April figures showing widespread falls in revenue - accommodation and food services (-88.1%), construction (-40%), arts and entertainment (-39.7%) Education (-33.4%), transportation and storage (-28.8%) wholesale, retail and motor services (-27%). A few other sectors have performed somewhat better, including Information and communication (-13.3%) and Financial and insurance services (-5.3%).
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 a £10 billion support scheme for the self-employed. An additional £16 billion earmarked for essential public services and £15 billion in grants and loans for businesses.
The total cost is estimated to be £103.6 billion, of which is £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% of GDP, and the national debt rising from 80% to an eventual 110% 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 of £100 billion, and while this runs the risk of future inflation and undermines 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 the low-paid and younger workers have been the most affected, since they tend to work in the sectors like hospitality, leisure and retail 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 reports that 27% of the lowest fifth in income distribution have been furloughed, while the figure for the top one fifth is only 10%.
Likewise, 8% of the lowest fifth in the income distribution have been made unemployed, while the corresponding figure for the top fifth is 2%. A young versus older worker divide exists, with 30% of 18-24 year olds furloughed and 10% made unemployed, while the figures for 54-59 year olds is estimated at 17% and 3% respectively.
The 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 as compared to the bottom fifth.
Incredibly, because they have not been spending so much on travel 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 have had to rely on loans and support from family and friends to make ends meet.
The Foundation also reports that employees in the “mixed or other ethnic group” category have suffered largest rate of job losses to date at 12%, together with Asian British at 11%, compared to a national average of 4%, 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 of the black ethnic group was 18% lower than for white people once allowance for benefits and taxes. The pandemic will worsen income inequality.
The ONS reports that 40% of workers in the poorest fifth of households have jobs in sectors of the economy with the highest exposure to the coronavirus and people from poorer income households are 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% per cent of the richest fifth do such work.
Another group that has been heavily impacted by the crisis have been the 5 million self-employed, almost half have lost work due to the crisis.
The labour market is exhibiting clear signs of severe distress. HMRC payroll data suggest that 600,000 have already been made redundant. Advertised vacancies have fallen from over 800,000 in March to below 400,000 today, while pay growth of average weekly wages which was 2.2% annualised in the first 3 months of the year, was -2.7% in the second quarter. There has been a rise of 2.5 million claiming Universal Credit.
The future looks bleak. Casualization and job insecurity of the workforce will increase significantly, fewer permanent jobs will be available, the gig economy and zero-hour contracts will become more commonplace, and more people will be forced into the vagaries of self-employment.
The public sector will not be immune as the need to balance the books force central government and councils to cut jobs, more public sector jobs will be offered on a short-term and/or zero-hour 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 a worse shape today than they were in the run up to the global financial crisis: net private non-financial profits were just above 9 per cent at the end of 2019, compared to around 11 per cent in 2008.
The end of the furlough scheme will mean that as many as 20% of furloughed workers or close to 2 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 that 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.