Ministers unable to explain why UK is the last major developed nation refusing to extend its jobs scheme ‘If the shock is big enough it could lead to a macroeconomic chain reaction and tip the economy into a double-dip recession’
The UK is the last major country in the developed world still planning to shut down its jobs support scheme this autumn, leaving British companies uniquely exposed as the pandemic wreaks further economic havoc.
Germany, France, Canada and Australia already plan to extend relief packages into next year through various means. Italy has announced that it is extending its furlough scheme until the end of December, despite a debt ratio nearing 160pc of GDP and warnings of a funding squeeze over coming months. Italy is also extending its firing ban.
Japan’s ruling LDP party has signalled that it will roll over the country’s emergency measures, citing concern over the slide in job vacancies and difficulties controlling the virus.
The United States is falling into line too as Republicans on Capitol Hill soften their resistance against a second jumbo rescue plan.
The US Congress is close to a deal that would extend cash payments to laid-off workers and the selfemployed until the end of the year, trimming aid from $600 (£456) a week to nearer $400 for some 30 million people.
This taper would end a glaring anomaly where two thirds of recipients were better off staying at home but it still leaves them with an average of $750 a week once state unemployment insurance is included.
This greatly reduces the danger of a cliff edge and a stalled recovery this autumn. US jobs data has been flashing warning signs for several weeks. The Census Bureau’s pulse survey suggests that 6.75m jobs were lost between mid-June and mid-July, reversing the gains since early May.
More than 1.6m filed for jobless benefits last week, once the pandemic programme is included. James Knightley from ING says the picture remains disturbing.
“I am getting nervous. Financial market optimism on a ‘V’-shaped rebound could be severely tested over the next couple of months,” he said.
Britain stands out like a sore thumb as the Treasury winds down furlough support. Aid will be cut to zero at the end of October, despite the Bank of England’s concerns that the recovery will be slower than first assumed.
This risks a sudden jump in redundancies before the British economy has reached full “escape velocity” and before there is any plausible chance of absorbing these workers in new sectors.
If the shock is big enough it could lead to a macroeconomic chain reaction and tip the economy into a double-dip recession, just as the Brexit process reaches a critical phase.
“This could be self-fulfilling even if there is no further spike in Covid-19,” said David Owen from Jefferies.
“But the furlough policy is not set in stone and I think they will have to revisit it in September.”
If not, struggling British companies may be forced to shed workers in large numbers, leaving them at a disadvantage against competitors able to retain trained workers in Europe and Asia. On top of this, they face the double whammy of two years’ VAT falling together next year.
“It is a disaster to take away stimulus too quickly. A third of the lost jobs may never come back and we could be looking at 4m unemployed,” said Prof Roger Farmer from Warwick University.
“The world economy is never going to be the same again after this and we need to treat it like a war.”
Jonathan Haskel from the Bank of England’s Monetary Policy Committee said the economic curse of Covid-19 is its cruel asymmetry. The affluent can often work from home and have mostly emerged unscathed, while the poor are concentrated in sectors that have taken the biggest hit and have the thinnest safety margin. Half of the unemployed have no savings.
Earners in the top quintile have been saving an extra £320 a week on average during the pandemic, mostly by cutting holidays, travel and eating out.
But a net majority of those earning below £35,000 saw an erosion of savings from May to early July, with sharp drops among the self-employed. Many have been forced to dip into their reserves to keep going.
It is the rich who dominate the policy and opinion classes. This may have led to an optimism bias: an assumption that pent-up spending will soon unleash V-shaped growth.
Haskel said “fear of unemployment” may drive up precautionary savings, setting off a “feedback loop” that amplifies the effect and ultimately morphs into a macroeconomic demand shock.
Furthermore, this may not be self-correcting. “I am concerned about the economy ‘getting stuck’ and recovering only slowly,” he said.
The Bank of England is betting that unemployment will peak at 7.5pc later this year. This is far less than originally feared and is based on early radar suggesting that large numbers have been returning to work. But hard data is still lacking. And its forecast still means that a million people will lose their jobs by Christmas, pushing the unemployment toll to 2.5m.
Such levels imply serious social stress but may not be high enough to set off second-round economic effects or a self-fulfilling relapse caused by people retrenching en masse.
Not all labour economists agree with the Bank’s bullish view. Danny Blanchflower, a former MPC ratesetter, said the estimate was “much too low” and does not take into account surging rates among schoolleavers, mostly facing a jobs desert. He thinks the coming cull will eclipse the Great Recession a decade ago, when the jobless rate hit 8.5pc.
What is certain is that the Government is going to have increasing difficulty explaining why the UK is the only country in the G7 block that is turning off job support before we know for sure whether the optimists or pessimists are correct.
A waitress serves customers in central Krakow. Many European countries have been more proactive than the UK on extending job support schemes