Am­brose Evans-Pritchard:

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 Daily Telegraph - Business - - Front Page - AM­BROSE EVANSPRITC­HARD

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

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