In the Bleak Midwinter – UK output and employment outlook

The latest figures for output and employment confirm how the Coronavirus pandemic and associated lockdowns have taken their toll on the UK economy this year. Senior Adviser Andrew Sentance takes a closer look at the divergent experience of sectors in the UK and what lies ahead for economic recovery.

In Q3, UK GDP was 8.6 percent down on a year ago despite a strong rebound in the summer and early autumn. In October, it was still 8.2 percent down on the same month in 2019.

On the jobs front, the unemployment total is rising as businesses adjust to the changed economic environment. The ONS reports that payroll numbers were 781,000 down on a year ago in November and self-employment has fallen by 464,000 over the past year. This amounts to an employment reduction of around 1.25 million, 3.5-4% of the workforce. This is likely to raise the unemployment rate to around 7 percent as we move into next year, unless there is a very strong rebound in activity in 2021.

The official unemployment rate is already moving clearly in that direction – up to 4.9 percent in the 3 months to October and 5.2 percent in the single month estimate for October.

But perhaps more significant than these broad economic trends is the divergent experience of sectors of the UK economy as the result of the pandemic crisis (Chart 1).

Chart 1

Four sectors have seen an output drop of more than 20 percent in the past year, even allowing for the bounce-back in Q3 and October: Hospitality (restaurants, pubs, hotels, etc); Arts and entertainment – including sports, theatres, cinemas and music; Administrative and support services; and “other services” which includes the likes of gyms, hairdressers, beauty salons, nail bars, etc.

On the employment front, we see a similar picture but with some slight differences (Chart 2). Hospitality, arts/entertainment and “other services” are the biggest losers of jobs – according to payroll data. Manufacturing and retail have also shed jobs more quickly than most other sectors of the economy. Administrative and support services, however, is still in the top 6 of sectors reporting job losses.

Chart 2

For these badly affected sectors the November lockdown and the new Tier 4 restrictions will compound the miserable economic outlook. Despite government efforts to support businesses through furlough payments, many may not survive through to the Spring/Summer of next year. Also, consumer behaviour is being changed by the pandemic and lockdowns. The longer restrictions continue on pubs, restaurants, gyms, hairdressers, nail bars, etc – the more likely it is that customers will change their spending patterns.

What next for the UK economy?

As we come out of lockdowns – which is not likely to be until the middle of next year at the earliest – the pattern of economic activity is likely to be more home-based. That means more home-working, more internet deliveries in the retail sector, and more social and business interaction over the internet rather than meeting up. The longer these changes in consumer behaviour continue, the less likely they are to reverse.

There are a whole host of implications which may flow from these structural changes in the economy. Office and retail properties are likely to be in less demand, transport patterns will change, and consumer behaviour will shift towards a more convenience-based and home-based model.

Every recession we experience creates a temporary dislocation of economic activity, followed by a recovery. But the shape of the economy which emerges from the recession is often different from the one which entered it. As we look forward to 2021 and 2022 we should be prepared for a world where activities based on social interaction and personal services are less dominant. And the key question is what activities will replace the output and employment contribution of these sectors as we move through the 2020s.

The most likely scenario is that the UK economy – and other major economies – faces a long period of adjustment through the 2020s as we seek to encourage new industries based on environmental sustainability and new technologies to replace the service sector activities damaged in the past year or so.

It will be a bleak midwinter as this process of adjustment takes place. But Spring and Summer follow Winter – so we can look forward to better times ahead, even if the recovery takes a while to emerge.

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