PERSPECTIVE3-5 min to read

How Covid-19 will impact UK employment

The UK’s unemployment rate is likely to rise, despite government support measures, as weaker demand and social distancing means some businesses may not survive the crisis.

24/06/2020
Unemployed-man

Authors

Azad Zangana
Senior European Economist and Strategist

The success and speed of the UK’s economic recovery after Covid-19 will partly depend on how many companies survive the crisis and how few jobs are lost.

What did the government do?

The government’s Coronavirus Job Retention Scheme, which has been extended until October, has helped to minimise the number of jobs lost so far.

Under the scheme, employees receive up to 80% of salaries, capped at £2,500 per month, with employers not making a contribution until September. The government also set up a similar scheme to help the self-employed, which is based on their previous reported income.

As of 21 June, 9.2 million or just over 30% of jobs have been furloughed. Meanwhile 2.6 million or 76% of eligible self-employed workers have made claims.

What has been the impact on public finances?

However, the cost of these schemes has been huge: £22.3 billion spent on the employee scheme, and a further £7.6 billion spent on the self-employed.

Indeed, public sector net borrowing so far in 2020 (to May) has reached an astonishing £102.9 billion, compared to just £5.2 billion during the same period in 2019, and is more than the total borrowing over the course of both 2018 and 2019!

In fact, public sector debt (excluding public sector banks) is now more than the UK’s annual gross domestic product (GDP) for the first time since 1963.

It is therefore imperative that the UK economy is reopened to ensure the sustainability of the country’s public finances. Although public borrowing will continue to rise in the short term, the number of workers furloughed should begin to fall soon as work resumes.

How have companies been affected?

Unfortunately, not all workers will be able to return to their jobs as normal. The business models of many companies are now being questioned. Moreover, social distancing rules will limit the capacity for many firms, and for some, will make trading unprofitable, or worse, physically impossible.

Of course, it will take a very long time before economic activity returns to its previous level, but as the UK tentatively moves to re-open its economy, we expect the economic recovery to gather momentum.

In recent weeks, a number of companies have announced job cuts in the UK. These include 3,000 at Rolls-Royce; 2,000 at BP; 1,000 at Bentley; 3,000 at Virgin Atlantic; 12,000 at British Airways (not all in the UK); 2,500 at Travis Perkins; and 1,500 at The Restaurant Group.

In September, companies will have to pay 12.5% of the cost of the compensation to furloughed staff, which rises to 25% in October. At present, the scheme is set to end by November and so at that point companies will either have to take staff back onto their payroll, or make them redundant. However, some companies will not wait that long. Banks and creditors are already reportedly forcing companies to dramatically cut costs before they will agree to extend their credit lines.

How do you expect the job recovery to look?

Much care will need to be taken when interpreting official labour market data in the coming months. For example, despite employment falling by 429,000 in the month of April, the unemployment rate remained unchanged at 3.9%. In fact, the number of unemployed only rose by 34,000. Most of those that lost their jobs became inactive, probably due to lockdown and unless an individual is actively seeking work, then they will not be classified as unemployed.

The claimant count rate, which excludes the unemployed that did not qualify for benefits (and so tends to be lower), may be a more useful indicator at present. This indicator combines claimants of Job Seekers Allowance benefits and Universal Credit for those that are seeking work.

However, this measure does not meet international standards because it excludes some people, and includes some claimants of Universal Credit that require top-ups due to low income. Still, the claimant count rate is a more timely measure. In May, it rose to 7.8%, which suggests that the unemployment rate may already be around 7.5%. 

It is possible that the unemployment rate could rise even further, possibly peaking at more than 10%, before falling back as the recovery continues. However, given the likely lower demand in the economy, and the challenges many businesses face, it is difficult to see how the jobless rate can drop back below 4% within the next few years.

As a result of prolonged higher unemployment, deflationary pressures - where falling prices weaken demand as consumers delay making purchases in the expectation that prices will continue to fall - are likely to build over the coming years. Inflation is likely to fall below 1% in the near future, which would require the governor of the Bank of England to write a letter to the Chancellor of the Exchequer to explain the undershoot.

Authors

Azad Zangana
Senior European Economist and Strategist

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