HM Treasury is in overdrive trying to solve the soaring national deficit whilst navigating the treacherous economic climate, resulting from the pandemic. So far the economy appears to be recovering faster than expected, albeit with scars. Yet figures seem to consistently beat the predictions made by official forecasts, which is a pattern we can see repeated throughout the Bounce Back in the UK Economy.
Bounce Back in the UK Economy
In the wake of the Covid-19 global pandemic follows a financial crisis in the making. Covid-19 has caused a seismic economic shock and the aggregation of a staggering national debt, with the bill rising by £20bn per fortnight, one year ago. A suite of government funded business support schemes come to a close this year, while traders make the most of opening up during a British summer flooded with domestic consumers, owing to the challenges with foreign travel caused by coronavirus. The Office for National Statistics (ONS) reports: “UK general government deficit (or net borrowing) was £304.0 billion in the financial year ending March 2021, equivalent to 14.5% of GDP.” This is indicative of the final cost of the government support schemes that sustained Britain throughout its worst recession in more than three centuries. This figure exceeds predictions made last July. Yet a healthy bounce back in the UK economy is driving business confidence. A bounce back in the UK economy is only to be expected after a fallow period of trading, leisure and retail all shutting down simultaneously to slow the spread of the virus. The extent and length to which we can expect this financial swell to continue is yet to be seen and depends on a number of interacting factors. According to the National Institute for Economic and Social Research (NIESR): “The Covid-19 pandemic has had a significant and uneven impact on the UK economy. The need to reduce personal interaction to limit the spread of the virus resulted in restrictions in economic activity that were mitigated by a range of policy support measures. Most prominent among the restrictions were three national lockdowns and the closure of venues in the contact-intensive hospitality, leisure and entertainment sectors. Most prominent among the mitigation measures were the government furlough scheme (the Coronavirus Job Retention Scheme, CJRS) that paid businesses to support the incomes of furloughed workers, and various government-underwritten loan schemes that helped businesses to survive.” In their evaluation: Modelling the impact of Covid-19 on the UK economy.
Business Confidence is Rising
UK business confidence is at its highest in four years, thanks to growing optimism about the post-Covid recovery, despite business owners highlighting concerns about the national workforce shortage, which could push up pay in the coming months. The successful, rapid vaccine rollout, removal of lockdown restrictions and changes to self-isolation rules all contributed to greater optimism among firms in August, according to a report by Lloyds Bank. The bounce back in the UK economy in August boosted business confidence in nine of 12 regions, particularly in the north-west according to Lloyds. This confidence rose sharpest in the services sector benefiting from betting back to work safely and sustainably. The Lloyds survey also tracked a seven-point rise in the proportion of firms expecting stronger business activity in the year ahead to 48%. The figures follow a bounce back in the UK economy in the second quarter, GDP expanded by 4.8% when lockdown measures were relaxed. However, the economy was still 4.4% smaller than in the final three months of 2019.
National Workforce Shortage
Employers have been facing new challenges trying to fill their staff vacancies, as growth slowed to a six-month low in August. A shortage of staff, pingedemic workforce disruption and disturbances to the supply chain have hampered UK businesses, forcing growth to slow down to the lowest rate in half a year. The Covid pandemic and Brexit have both contributed to the current National workforce shortage, with furloughed workers finding new jobs and EU nationals returning to their home countries. A growing number of businesses have started increasing pay to try to lure staff, particularly lorry drivers, after a drop in available workers put a squeeze on UK supply chains and left some retailers and restaurants struggling to maintain stock and serve customers. The labour crunch has been blamed on Covid as well as post-Brexit immigration policies that have made it harder for foreign workers to secure visas in the UK. Meanwhile business confidence across the eurozone dipped in August, which some analysts have attributed to fears over the Delta variant. “With expectations of an autumn resurgence of the virus, stricter corona measures are an important downside risk to the outlook,” said Bert Colijn, an ING senior economist.
One Million Job Vacancies New Monthly Record
Wage growth hit a record high in July as businesses posted more than 1 million new job vacancies for the first time in an unprecedented scramble for staff following the loosening of lockdown rules. This surged from 50,000 the previous month. This reflects the scale of the recovery from the deepest economic slump in 300 years. Although the Bank of England (BoE) expects pressures within the labor market to prove temporary, policy makers warn that meeting the 2% inflation target will require a modest withdrawal of monetary stimulus. The chancellor said: “It’s fantastic to see businesses across the UK open, employees returning to work and the numbers of furloughed jobs falling to their lowest levels since the scheme began…Our plan for jobs is working, saving people’s jobs and getting people back into work… There could still be bumps in the road, but the data is promising.” The (ONS) has reported a surge in average earnings to a record 8.8% from a year earlier. This is partially due to distortions created by the pandemic. The headline rate of unemployment fell to 4.7% in the second quarter, the lowest since the summer of 2020 after the first pandemic lockdown. The real test will come when the government winds up its final stage of the furlough scheme on 30th September.
Furlough Scheme Closes
Officially known as the Coronavirus Job Retention Scheme (CJRS), furlough comes to a complete end on 30th September. Some will heave a huge sigh of relief, while others may well be made redundant. However early indications are that closing the furlough scheme later this month will not cause a drastic rise in unemployment following the government’s scheme “supporting the livelihoods of 9 million people now through furlough”, according to the Prime Minister. Despite some cases of the scheme being abused by dishonest employers, we are seeing HMRC get tough on fraudulent furlough claims alongside increased investment in compliance capabilities. Tax data indicates that about 80% of the payrolls lost during the pandemic have now been recovered. The overarching outcome is that CJRS was a successful life preserver for the bounce back in the UK economy, businesses and workforce alike. This also proves the effectiveness of large scale welfare packages when those needing vital support are entrusted with the government’s money to maintain the stability of the economy once the nation could pull through the living of lockdown measures enabled by the rapid and effective vaccine roll out programme. Learning from this success the government should, we hope, step forward with a well-designed, flexible strategy to navigate the economy through a near perfect storm of challenges.
Temporary Spike in Inflation
Inflation has risen sharply this year, driven in part by price rises in products like cars, chips and furniture, plus disruption to the supply chain. Some experts think this could signal forthcoming economic instability, whereas others say that a current spike in inflation will be temporary and can be explained by the bounce back in the UK economy. In the UK, inflation rates have barely been above 4% for nearly a decade, so this latest spike in inflation is not necessarily a cause for alarm at only 2.1%, yet there is fierce debate among economists over whether higher inflation is in the pipeline. It’s possible that years of low inflation have made economists complacent. In the wake of the Covid-19 global pandemic follows a financial crisis in the making. Covid-19 has caused economic shock and the steep rises in national debt could potentially lead to more risky levels of inflation. Others say there isn’t really any underlying cause for concern. Inflation was low before the pandemic and they don’t believe that will fundamentally change following the bounce back in the UK economy. The ONS predicts that growth in earnings is tracking between 4.9% and 6.3%. For pay excluding bonuses, the figure is estimated at 3.5% to 4.9%. The BoE will be watching carefully the rising wage pressures and how this will feed the spike in inflation, which jumped above their target of 2% in May and June. The Monetary Policy Committee (MPC) predicts a surge in consumer prices as much as 4% around the end of this year, before falling back toward the 2% goal in 2023. Despite the national workforce shortage, the number of unemployed is higher than before the pandemic. This is contributing to inflation pressures because of the restriction to the supply of labour. While these frictions have started to level out, the BoE acknowledges the potential that these issues could still become bigger than projected and persist for longer.
Surge in New Businesses Registrations
Hundreds of thousands of new businesses were launched in the UK last year as the pandemic drove entrepreneurial spirit. 835,494 new businesses were registered in the UK during the last year. That’s a 41% increase from 2019 and a 96% increase from 2018 and 141% increase from 2017 when 345,675 new businesses were registered. The most popular new businesses between January 2020 and January 2021 is retail sale through mail order houses or via internet, with 39,733 registered. New businesses within this category include internet auctions, internet retail sales, mail order, radio direct sales, telephone direct sales, and television direct sales. This is followed by buying and selling property/real estate with 30,637 businesses registered. In third place is ‘management consultancy activities other than financial management’, with 29,911 new businesses registered. ‘Other service activities n.e.c.’ with 26,397 registrations followed and in fifth place ‘other letting and operating of own or leased estate’ with 26,264 businesses registered. London registered the highest number of new businesses with 219,679. Followed by Birmingham with 19,724 businesses and Manchester with 17,517 businesses registered in the last year. Generation Z accounted for 18,000 start-ups registered in 2020. In the year from February 2020, there has been a 72% increase in 16-20-year-olds registering as sole traders compared to the previous year. In fact, it was the only age group to experience an increase in sole traders. The pandemic was viewed as a key driver with a 32% drop in job vacancies in 2020 compared to 2019 and one-fifth of hospitality jobs lost last year. Males make up 71% of new sole traders in total, and this is the case for every age group. In 16-20-year-olds, women are 80% less likely to start a new business than men.
House Prices Rising
House prices are rising at their fastest rate in nearly 17 years after a sprint to meet a stamp duty holiday deadline in England and Northern Ireland pushed the annual rate of property inflation to 13.2% in June. The ONS says that the average house price across the UK increased by £31,000 to £266,000 over the past year. Equivalent to just over £2,500 a month. Land Registry data shows that house price inflation stood at 2% in June 2020 but has gradually increased over the previous 12 months. A backlog of demand, the search for bigger homes as a result of working from home, and the decision by the chancellor, Rishi Sunak, to waive stamp duty on properties worth less than £500,000 have all contributed to this rise. The sharp jump in house price inflation from 9.8% in May was linked to the start of July deadline for the threshold for paying stamp duty to drop to £250,000, ahead of a return to its pre-crisis level of £125,000 from October. Wales showed the biggest jump in house prices of the four countries of the UK, registering property inflation of 16.7% in the past year. The price of a home rose by 13.3% in England, 12% in Scotland and 9% in Northern Ireland. The north-west of England saw the biggest rise. Prices were up by 18.6%. London, the part of the UK hardest hit by the repeated coronavirus economic lockdowns, recorded the smallest annual increase, 6.3%. Experts anticipate that house price growth will mellow over the coming months, after the effect from the temporary increase in the stamp duty threshold fades away. Price rises were already much slowed down in August, year on year.
Uneven Bounce Back in the UK Economy
London and the south-east have led the bounce back in the UK economy, which could be expected. Driven by increased spending on construction and leisure, these are industries wherein many new startups are emerging. Interestingly we are seeing a boost to domestic services such as beauty businesses and food and other local delivery services and not yet tech, innovation and export. The findings of the National Institute for Economic and Social Research (NIESR) however, indicate that the north-east, for example, will not get back to pre-pandemic levels of output until 2024. Furthermore NIESR says that nowhere in the UK is returning to the growth trends before the pandemic and the nation risks becoming trapped with low growth, low skills, high regional inequality and low export trade, also being affected following brexit.
Public Borrowing Halved
HM government borrowed a further £10 billion in July, the second highest amount for that month on record. However once again this figure beats the prediction made by official forecasts. This figure also represents half of what the treasury borrowed in July 2020, while the economy struggled under social distancing restrictions, closed offices and the introduction of local lockdowns, beginning in Leicester. Currently the total public debt is £2.2 trillion, which is nearly 99% of GDP. This is the worst level since 1962, when second world war debts were troubling the economy. However during the first quarter government borrowing was £25 billion under the predicted total.
Difficult Decisions Ahead
Mr Sunak has some difficult decisions coming up if he is to make public finances more sustainable. We are yet to see if he can limit increases in overall public spending and tackle NHS waiting list backlogs, whilst maintaining manifesto commitments, for example: not raise the main rates of tax, while continuing to deliver social care reform and other manifesto pledges such as the triple lock pension scheme, which Mr Sunak has already hinted could be broken to ensure “fairness for pensioners and taxpayers”. However the pandemic has led to a unique, anomalous economic climate, which means breaking the triple lock promise could prevent the Treasury being landed with a £3bn uprating bill as a result. Another backlash from Sunak’s success is possible demands from ministerial colleagues for more cash to be redirected to their department’s challenges, from the Treasury’s apparent saving. The rapid success of the economic bounce back so far has placed chancellor Rishi Sunak in a strong political position according to commentators. This good fortune has been supported by the incredible development of effective vaccines and the rapid speed of rollout achieved by the National Health Service (NHS).
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