Britain stands out like a sore thumb as the Treasury winds down furlough support. Aid will be cut to zero at the end of October, despite the Bank of England’s concerns that the recovery will be slower than first assumed. This risks a sudden jump in redundancies before the British economy has reached full “escape velocity” and before there is any plausible chance of absorbing these workers in new sectors.
If the shock is big enough it could lead to a macroeconomic chain-reaction and tip the economy into a double-dip recession, just as the Brexit process reaches a critical phase.
“This could be self-fulfilling even if there is no further spike in Covid-19,” said David Owen from Jefferies. “But the furlough policy is not set in stone and I think they will have to revisit it in September.”
If not, struggling British companies may be forced to shed workers in large numbers, leaving them at a disadvantage against competitors able to retain trained workers in Europe and Asia. On top of this, they face the double whammy of two years’ VAT falling due next year.
“It is a disaster to take away stimulus too quickly. A third of the lost jobs may never come back and we could be looking at four million unemployed,” said Prof Roger Farmer from Warwick University. “The world economy is never going to be the same again after this and we need to treat it like a war.”
Stephen Haskel, a member of the Bank’s Monetary Policy Committee, said the economic curse of Covid-19 is its cruel asymmetry. The affluent can often work from home and have mostly emerged unscathed, while the poor are concentrated in sectors that have taken the biggest hit and have the thinnest safety margin. Half of the unemployed have no savings.
Earners in the top quintile have been saving an extra £320 a week on average during the pandemic, mostly by cutting holidays, travel and eating out.
But a net majority of those earning below £35,000 saw an erosion of savings from May to early July, with sharp drops among the self-employed. Many have been forced to dip into their reserves to keep going.
It is the rich who dominate the policy and opinion classes. This may have led to an optimism bias: an assumption that pent-up spending will soon unleash V-shaped growth.