Hit to employment to prevent a perfect V-shaped recovery - Capital Economics
UK Economics

Hit to employment to prevent a perfect V-shaped recovery

UK Economics Weekly
Written by Ruth Gregory

The big declines in retail sales volumes in March and in the PMI activity surveys in April make it clear that the slump in activity has been unprecedented in terms of its speed and its severity. We continue to believe that economy has contracted by 25% from peak to trough. Perhaps even more worrying are the growing signs of widespread job cuts, the adverse effects of which will prevent a perfect V-shaped recovery.

This week’s economic news has been in line with our expectations that economic output will fall by around 25% in the first half of this year. The 5.1% m/m fall in retail sales volumes in March suggests that household consumption declined by at least 4% q/q before the full effects of the lockdown were felt. (See here.) A new Office for National Statistics (ONS) survey found that 24% of all UK firms have now halted their operations. And the slump in the IHS Markit/CIPS composite PMI in April is consistent with GDP contracting by at least 6% m/m in April, as big as the fall seen during the whole of the GFC. (See here.)

Perhaps more worrying have been the growing signs of widespread job cuts, the adverse impact of which will hold back the subsequent economic recovery.

Admittedly, by 22nd April, the government’s Coronavirus Job Retention Scheme – which pays furloughed workers 80% of their normal salary up to £2,500 a month for four months – had processed 3.2 million people. And another ONS survey, also released this week, suggests that this figure may soon rise to 9 million, or 27% of the workforce.

Even so, the scheme appears to have come too late to prevent an initial round of redundancies. The IHS Markit/CIPS surveys showed that firms are already sharply reducing staffing levels. April’s composite employment index fell below that seen at the height of the GFC, pointing to a 5%, or 1.9 million, fall in employment in Q2.

And timely Universal Credit claims figures suggest that more than 1.75 million new applications were lodged in the four weeks to 9th April. These numbers are shown in black on Chart 1 and are eight times bigger than the normal 55,000 new claims per week.

That doesn’t mean unemployment will rise by 1.75 million. Since Universal Credit was first rolled out in 2013, an average of 45% of new claims have been upheld (some individuals make multiple claims and some are not eligible). And on average only 37% of those whose claims are successful are applying because they are searching for work, rather than for the other benefits that fall under the Universal Credit umbrella. (See here.) Even if we raised that share to 60%, as it makes sense that more people than usual are losing their jobs now, then the actual rise in unemployment would be “only” around 390,000.

Chart 1: New Applicants for Universal Credit (000s)

Sources: DWP, Capital Economics

Even so, that would be enough to raise the unemployment rate from 4.0% in February to 5.3% in April. And if workers find that they do not have jobs to go back to once the lockdown ends, as more firms cannot balance the books once the government support ends, then worse is yet to come. (See here.)

As a result, we expect the unemployment rate to rise to nearly 9% in the coming months and to take several years to fall back to its pre-recession level. (See here.) That suggests the labour market will remain a constraint on the pace of economic recovery for several years to come, supporting our view that the chances of a perfect V-shaped recovery are very low.

The week ahead

We expect April’s sentiment figures to support other evidence that business and consumer confidence fell through the floor in early April. Thursday’s release of corporate insolvency figures for Q1 may also provide an early insight into the number of firms that went out of business at the start of the lockdown in late-March.


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Consensus*

CE Forecasts*

UK Data Response

Mon 27th

UK

BoE Asset Purchase Facility Report (Q1)

(09.30)

Tue 28th

UK

CBI Distributive Trades Survey (Apr)

(11.00)

-3

-50

Wed 29th

UK

BRC Shop Price Index (Apr)

(00.01)

(-0.8%)

UK

UK Economic Sentiment (Apr)

(10.00)

UK

Stephen Barclay testifies to Treasury Committee

(14.00)

Thu 30th

UK

Company Insolvencies (Q1)

(09.30)

4,284

Fri 1st

UK

IHS Markit/CIPS Manufacturing PMI (Apr, Final)

(09.30)

32.9

32.7

32.7

UK

Net Consumer Credit (Mar)

(09.30)

+£0.9bn

+£0.7bn

+£0.7bn

UK

Mortgage Approvals (Mar)

(09.30)

73,500

63,000

55,000

UK

M4 Money Supply (Mar)

(09.30)

+0.3%(+4.9%)

Also expected during this period

28th – 3rd

UK

Nationwide House Prices (Apr)

+0.8%(+3.0%)

-0.3%(+2.5%)

-1.0%(+1.7%)

Selected future data releases and events

Tue 5th

UK

IHS Markit/CIPS Composite PMI (Apr, Final)

(09.30)

12.9

DR

UK

IHS Markit/CIPS All-Sector PMI (Apr, Final)

(09.30)

DR

UK

IHS Markit/CIPS Services PMI (Apr, Final)

(09.30)

12.3

DR

Wed 6th

UK

IHS Markit/CIPS Construction PMI (Apr, Final)

(09.30)

39.3

DR

Thu 7th

UK

GfK Consumer Confidence (Apr)

(00.01)

-34

UK

BoE Monetary Policy Decision

(12.00)

DR

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts**

%q/q(%y/y) unless stated

Latest

Q1 2020

Q2 2020

Q3 2020

Q4 2020

2019

2020

2021

2022

GDP

0.0(+1.1) (Q4)

-1.5(-1.1)

-24.0(-24.7)

+16.0(-13.2)

+4.8(-9.0)

(+1.4)

(-12.0)

(+10.0)

(+3.7)

CPI inflation

(+1.5) (Mar)

+0.3(+1.7)

0.0(+0.8)

+0.2(+0.6)

+0.2(+0.7)

(+1.8)

(+1.0)

(+1.0)

(+1.6)

ILO unemployment rate (%)

4.0 (Feb)

4.6

8.5

8.0

6.5

3.8

7.0

5.7

5.3

Bank rate, end period (%)

0.10

0.10

0.10

0.10

0.10

0.75

0.10

0.10

0.10

10 yr gilt, end period (%)

0.28

0.25

0.25

0.25

0.25

0.82

0.25

0.25

0.50

$/£, end period

1.24

1.24

1.24

1.24

1.25

1.33

1.25

1.30

1.30

Euro/£, end period

1.15

1.14

1.14

1.14

1.14

1.18

1.14

1.24

1.24

Sources: Capital Economics, Refinitiv

** Assumes that the restrictions on activity created by the coronavirus lockdown last for three months from late March to late June. Assumes the UK and the EU agree to extend the Brexit transition period for a year from 31st December 2020 and strike some sort of trade deal thereafter perhaps in a step-by-step approach. (See here.)


Ruth Gregory, Senior UK Economist, +44 7447 466 451, ruth.gregory@capitaleconomics.com