- The "Summer Economic Update," a de facto mini-budget, is expected to include tax cuts and new spending pledges in a bid to stimulate demand as the U.K. economy begins to reopen.
- Credit Suisse has projected that ending the country's furlough scheme could result in unemployment rising from 3.9% to 10%, or 3.5 million people, in the second half of the year.
- "Ending the furlough scheme in October is like building a bridge that goes three quarters of the way across a river," said Mike Bell, global markets strategist at JPMorgan Asset Management.
U.K. Finance Minister Rishi Sunak will deliver a fresh set of policy initiatives on Wednesday as Britain looks to spark an economic recovery from the coronavirus pandemic.
The "Summer Economic Update," a de-facto mini-budget, is expected to include tax cuts and new spending pledges in a bid to stimulate demand as the U.K. economy begins to reopen.
In his March budget, Sunak announced a £30 billion ($39 billion) spending package to tackle the immediate health and labor market impact of the pandemic and the nationwide lockdown it forced. Markets have since become accustomed to significant support announcements from the chancellor, and additional assistance from the Bank of England's monetary policy bazooka.
However, with markets stabilized, lockdown mostly lifted and the virus seemingly under control in the country, few are expecting the kind of fiscal fireworks Sunak has delivered in the past.
The Treasury revealed Tuesday night that Sunak will announce a £2 billion ($2.5 billion) "kickstart scheme" aimed at subsidizing six-month work placements for people aged 16-24 who are at risk of long-term unemployment, along with a £111 million investment to triple the scale of traineeships in 2020-21.
Alongside the jobs plan, Sunak is also expected to announce a temporary holiday from the property tax known as stamp duty for properties worth up to £500,000 in a bid to stimulate the property market.
"Expect Sunak to announce targeted measures to lift the flagging parts of the economy and those areas that may struggle under the continued social distancing measures," Berenberg Senior Economist Kallum Pickering said in a note Tuesday. For example, on Sunday the government announced a £1.6 billion package to support the arts sector.
The U.K. economy has contracted sharply since the beginning of the pandemic, with April's 20.4% fall in gross domestic product the steepest monthly decline on record. Meanwhile borrowing surged to £103.7 billion ($128.9 billion) in the April-May period, meaning public sector debt surpassed GDP for the first time since 1963.
However, central to the country's ability to weather the economic storm so far has been the furlough scheme, which has supported more than 30% of the nation's jobs and meant that the steep drop in output has not filtered through to the labor market as yet. The program has been credited with preventing the country's looming recession from morphing into a deep and prolonged depression.
Sunak has previously indicated that the furlough scheme is likely to be tapered from August and end in October, but Credit Suisse has projected that this could result in unemployment rising from 3.9% to 10%, or 3.5 million people, in the second half of the year.
In a note Monday, the bank's economists suggested it was unlikely that the 9.3 million furloughed workers would be reabsorbed into the jobs market, with the end of furlough bringing about another wave of redundancies.
"This is because, beyond the near-term pickup, we think there is a risk that the recovery slows down as consumer caution due to the persistence of the virus and social distancing restrict domestic demand and Brexit risks weigh on sentiment" the note said.
Credit Suisse urged Sunak to either extend the furlough scheme beyond October or replace it with a scheme that subsidizes wage costs or cuts National Insurance contributions for the sectors likely to be hardest hit, like retail, travel and hospitality.
Mike Bell, global markets strategist at JPMorgan Asset Management, told reporters at a virtual roundtable Tuesday that the British economy was "propped up in a state of suspended animation" by the furlough scheme. He warned that many of the currently furloughed workers would end up unemployed once the scheme is lifted as a number of sectors struggle to recover.
"Ending the furlough scheme in October is like building a bridge that goes three quarters of the way across a river," Bell said. He stressed that the signals of economic recovery in the U.K. do not account for the potential fall in consumer spending and economic activity, should furloughed jobs end up being lost.
Temporary National Insurance cuts are among the potential policy initiatives floated in advance of Sunak's speech, along with the subsidies for businesses hiring trainees. Other possible announcements include a temporary cut to VAT (currently at 20%) and temporary exemptions to business property taxes.
Some newspaper reports over the weekend suggested that various initiatives could be announced on Wednesday but implemented in the Fall budget, which Berenberg's Pickering suggested would be counterproductive, particularly in relation to the stamp duty cut.
"Rather than stimulating a housing market recovery, it would delay it by incentivizing people to wait until the tax cut before buying a house," he said, arguing that any policies announced Wednesday should be rolled out as soon as possible.
"The risks of a policy mistake are asymmetric – with greater costs associated with doing too little rather than too much," he added.
Berenberg estimates that U.K. output is currently around 15% below its pre-recession peak, given data points like May's 10% rebound in retail sales and more optimistic survey data. But it does not expect GDP to return to the level seen in the fourth quarter of 2019 until early 2023.
"The uncertainty about the precise shape of the recovery, as well as continued downside risks coming from a second wave of the virus and a disorderly exit from the single market at the end of the year, justify further aggressive policy action," Pickering added.