Analysis from Dr John Ashcroft on the economic impact of Covid-19
Our views on recovery are unchanged. We expect output to be down, by around 10% in the third quarter, and down by 5% in the final quarter of the year. Output for the year as a whole, will be down by 10%. Unemployment is set to rise to between 2.5 and 3.0 million, a rate of 7.5% and 8.5%, without any additional extension to the job support scheme. Latest data confirms output in the UK economy fell by 21.6% in the second quarter compared to the prior year. Manufacturing output was down by 24% and construction output was down by almost 40%.
Service sector output fell by 22%. The hotel and leisure sector was down by a staggering 87%. Data from the Civil Aviation Authority confirms passenger numbers in the UK were down by 99% in Q2 as lockdown and travel bans were imposed. Overseas tourism remains problematic. Passenger numbers have risen but are expected to be just 15% of prior year levels in the third quarter. The good news is that restrictions on overseas travel will mean that almost 80 million people will be looking to holiday in the UK.
Latest survey evidence suggests a strong recovery in manufacturing and construction is underway. Retail sales remain buoyant. The housing market is experiencing an increase in demand and price levels, plus online sales and logistics are driving growth in the retail sector. Retail sales increased by almost 3% in August. Excluding fuel, total sales volumes increased by over 4%. DIY led the charge. B&Q and others benefited, with DIY sales up by 20%. Garden centres were blooming. Green fingers tapped the tills with a 17% increase in horticultural goods sales, year on year. The upturn in the housing market also boosted sales of white goods and floor coverings. Pride in appearance appeared to take a back seat. Sales of clothing, cosmetics and footwear were down over 15%. Watches and jewellery sales were down by 12% in August.
The surge in online sales continued. The year on year growth was over 50%, accounting for 28% of all retail transactions. Online food sales were up by 90% year on year, accounting for 10% of all food action. Ocado has overtaken Tesco as the UK’s most valuable retailer. Recruitment is increasing at Amazon, Deliveroo, and THG.
In the property market, a record amount of warehouse space was let over the latest three months, as online retailers seek to increase capacity. The pressure on conventional retail continues. Lower levels of workers in the office are placing pressure on Pret, Greggs and Hotel Chocolat. Just 60% of working adults were travelling to work by the end of September. Next boss Lord Wolfson has warned thousands of traditional retail jobs will be lost as a result of the rapid transition to online retail. The hotel and leisure sector has been badly hit by the lockdown measures. The introduction of the 10pm curfew could lead to the loss of 300,000 jobs as 12,000 pubs and bars call time for the last time, according to a recent report by Oxford Economics.
Sector specialists have warned of one million jobs lost in the hospitality sector and 300,000 in the events business as lockdown continues. Hopes remained for an extension of the furlough scheme until the end of the year at least. It was not to be. Rishi Sunak cancelled the Autumn Budget and announced his Winter Plan. The Chancellor’s Winter plan revealed, the furlough scheme would come to an end as stated at the end of October. There would be a further extension of the VAT cut for the hospitality sector. Generous cash flow provisions were added for VAT and Loan repayments. The complex Job Support Scheme would be introduced. At best the jobs crisis may be postponed to the end of January. With just weeks to go before the end of the job retention scheme, more than one in ten workers remain on furlough, according the ONS. The Office For Budget Responsibility fears that over half of those on furlough, at the end of September, could end up losing their jobs.
“I cannot save every business, I cannot save every job” warned the Chancellor. “Can’t Pay, Won’t Pay” suggest the critics.
Government borrowing is expected to rise to over £200 billion in the first six months of the year. Could the furlough scheme be extended? At a projected cost of £52 billion by the end of October, so what of a further £20 billion into Easter next year? The Chancellor may not be able to save every job but he may have to do better than his Bleak Mid Winter Plan if the surge in job losses is to be avoided.
Dr John Ashcroft specialises in economics, strategy and financial markets. He is author of The Saturday Economist, great updates every week on the UK and World Economy. The Saturday Economist Live is now available as a podcast and on Zoom. “Fast Moving, Content Rich and Fun.” Find out more… www.thesaturdayeconomist.com