How far will employment have to fall to meet GDP? - Capital Economics
UK Economics

How far will employment have to fall to meet GDP?

UK Economics Weekly
Written by Andrew Wishart

The end of the national furlough scheme on 31st October sets the stage for a sharp fall in employment. That’s why the Chancellor had to increase the generosity of the replacement Job Support Scheme. Even so, when that new scheme ends in April next year, employment will fall back in line with GDP. That points to a 1.4m fall in employment and the unemployment rate rising to almost 8% next year.

Usually employment is determined by the number of workers needed to satisfy demand, so it has a good relationship with GDP. (See Chart 1.) But due to the national furlough scheme, despite GDP (the black line) plunging, employment (the blue line) held up better. At some point the two lines will meet, which will determine how far unemployment rises. The question is when and at what level.

Chart 1: GDP & Employment

Sources: Refinitiv, ONS, Capital Economics

The government has been more reticent to provide fiscal help during the second wave of the virus. But with the number of people in hospital with COVID-19 higher than in March, the health situation looks just as dire. Rather than a national lockdown, there are regional restrictions. But these are already widespread. As of Saturday, areas accounting for 20% of GDP will be under Tier 3 restrictions or equivalent, where many consumer services venues must close. And 42% will be in Tier 2. That prohibits people meeting those they don’t live with inside, hurting demand in hospitality. (See Chart 2.)

Chart 2: GVA by COVID-19 Restriction Area (%)

Sources: ONS, Gov.uk, Capital Economics

Unsurprisingly, given the prevalence of the virus and the restrictions, the economic recovery has stalled. Admittedly, retail sales rose yet further above their pre-virus level in September. (See here.) But consumer confidence is falling as are visits to recreation and retail premises. The composite PMI fell in October (see here) and the BICS suggests that business turnover declined at the start of October. The upshot is that the rebound in the black line in Chart 1 is faltering. That would set a lower level for employment to fall to when the national furlough scheme, which over 2 million people still appear to be on (see here), ends on 31st October.

That’s why the Chancellor had to step up the generosity of the Job Support Scheme before it replaces the furlough scheme on 1st November. The government will now pay up to 49% of employees’ wages, up from 22% under the initial plan. Along with new grants for hospitality businesses in Tier 2 areas, this cements our view that there will be little slowdown in the pace of government borrowing in the second half of the year. (See here.) Even so, when the scheme ends in April next year, employment will fall to GDP. That points to a 1.4m fall in employment and the unemployment rate rising to almost 8%.

The Bank of England will also do its bit. While external members of the MPC have talked up negative interest rates recently, the “insiders” have made it clear that negative rates aren’t imminent. (See here.) Dave Ramsden said this week “while there may be an appropriate time to use negative interest rates, that time is not right now”. Instead, a further £100bn of QE in November and more than the consensus expects in 2021 seems most likely, keeping gilt yields very low and affording the government the fiscal space it needs to deal with the crisis. (See here.)

The week ahead

Borrowing data from the Bank of England on Thursday may show consumer demand struggling, while the resumed Brexit negotiations will continue.


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Consensus*

CE Forecasts*

Data Response

Mon 26th

No Significant Data Released

Tue 27th

UK

CBI Distributive Trades Survey (Oct)

(11.00)

+11.0

+2.0

Wed 28th

UK

BRC Shop Price Index (Oct)

(00.01)

(-1.6%)

Thu 29th

UK

M4 Money Supply (Sep)

(09.30)

-0.4%(+12.1%)

0.0%(+11.3%)

DR

UK

Net Consumer Credit (Sep)

(09.30)

+£0.3bn

+£0.7bn

+£0.2bn

DR

UK

Mortgage Approvals (Sep)

(09.30)

+84,700

+75,000

+80,000

DR

UK

UK Economic Sentiment Survey (Oct)

(10.00)

83.0

DR

Fri 30th

No Significant Data Released

Selected future data releases and events

Mon 2nd

UK

IHS Markit/CIPS Manuf. PMI (Oct, Final)

(09.30)

53.3p

DR

Wed 4th

UK

IHS Markit/CIPS Comp. PMI (Oct, Final)

(09.30)

52.9p

DR

UK

IHS Markit/CIPS Serv. PMI (Oct, Final)

(09.30)

52.3p

DR

Thu 5th

UK

IHS Markit/CIPS Construc. PMI (Oct)

(09.30)

56.8

UK

BoE Monetary Policy Decision (Nov)

(12.00)

+0.10%

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

-19.8(-21.8) (Q2)

-2.5(-2.1)

-19.8(-21.8)

+15.6(-9.5)

+1.3(-8.4)

(+1.5)

(-10.4)

(+6.0)

(+4.5)

CPI inflation

(+0.5) (Sep.)

(+1.7)

(+0.6)

(+0.5)

(+0.5)

(+1.8)

(+0.9)

(+1.4)

(+1.5)

ILO unemployment rate (%)

4.5 (Aug)

4.0

4.1

4.6

5.8

3.8

4.6

6.8

6.8

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 (%)

0.30

0.39

0.18

0.25

0.15

0.83

0.15

0.15

0.15

$/£, end period

1.31

1.24

1.25

1.29

1.35

1.33

1.35

1.35

1.35

Euro/£, end period

1.10

1.14

1.14

1.14

1.13

1.18

1.13

1.13

1.13

Sources: Capital Economics, Refinitiv


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com