Economic Perspectives –
Coronavirus crisis: more Covid restrictions and the labour market weakens
The latest Perspective from Ruth Lea CBE, Economic Adviser to Arbuthnot Banking Group.
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK developments:
- The Prime Minister announced the Government’s new three-tiered system of Covid Alert Levels for England on 12 October.
- The three tiers are tier 1 (“medium”), tier 2 (“high”) and tier 3 (“very high”, including Liverpool). Greater London was transferred from tier 1 to tier 2 on 17 October.
- The overall effect of these decisions is to tighten restrictions on the economy, with the hospitality sector particularly affected.
- The labour market is weakening. The unemployment rate rose to 4.5% in the three months to August, whilst redundancies increased a record 114,000 in the quarter to 227,000 and employment fell 153,000. The fall in employment was driven by workers aged 16-24 and over 65.
- There was some improvement in vacancies in the three months to September and actual hours worked in the three months to August. But they were both still well down on levels prior to the pandemic.
- Total earnings growth in nominal terms was flat (YOY) in the three months to August, whilst in real terms it fell by 1.2% (YOY).
The IMF’s latest forecast:
- The IMF’s October forecast was less pessimistic, on the whole, than in June. World GDP is now expected to fall by 4.4% in 2020 (5.2% in June).
- US GDP is now expected to contract by 4.3% in 2020, whilst the Eurozone’s GDP is projected to fall by 8.3%. Within the Eurozone, German GDP could fall by 6.0% in 2020, compared with 9.8% in France and 10.6% in Italy.
- The IMF made only minor adjustments to their UK forecasts, with a contraction of 9.8% projected for 2020 (10.2% in June) followed by a 5.9% part-recovery in 2021 (6.3% in June).
- China is expected to grow by 1.9% in 2020, followed by a buoyant 8.2% in 2021.
- The pandemic has led to significant increases in the General Government deficit/GDP and debt/GDP ratios. UK net borrowing is expected to rise to 16.5% of GDP in calendar year 2020, whilst debt is projected to be 108% of GDP in 2020.
- The Prime Minister’s deadline of 15 October for securing agreement on the UK-EU future relationship has passed, with, apparently, little progress made in recent weeks, including at the EU Summit (15-16 October).
- The Prime Minister announced on 16 October that UK “should prepare for a “no deal” outcome, trading under WTO rules”. He added that the Summit had appeared “to rule out a Canada-style deal.”
- The UK has not ruled out further negotiations on the future relationship, providing the EU changes its approach to the UK’s wish for a Canada-style deal.
Ruth Lea said “The is little doubt the labour market is now deteriorating. Moreover, the deterioration will almost certainly accelerate significantly in forthcoming months, assuming the furlough scheme ends at end-October, as planned. Rising unemployment, coupled with the latest Covid restrictions on the economy, increases the risk that the economy could not just stagnate in 2020Q4, but could contract, raising the risk of a “double-dip” recession”.
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