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16 November 2020: A tempered response

The latest brief from the bank’s chief economist.

Last updated: 16 Nov 2020 5 min read

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Last week’s hugely encouraging news on the vaccine, as well as a slowing of new cases in western Europe, was tempered by mounting growth concerns. Before the sunlit uplands of a vaccine-inspired rebound, a very challenging winter awaits us. In many parts, the coming months will see the recovery go into reverse.

Rebound, but...

After a fifth of economic output was wiped out in Q2 came the rebound in Q3, with the economy expanding nearly 16%. But that masks weakening momentum over the quarter, with GDP rising just 1.1% in September. The education (return to schools) and transport and storage (some returned to their place of work) sectors made big contributions. But the accommodation and food sector declined over 8% in the month as Eat Out to Help Out came to an end. That sector was still 22% below peak and is set to get a lot worse amid a second lockdown. Overall, output is still nearly 9% below its pre-Covid level. It will take a substantial loosening of restrictions before losses can be clawed back.

Fallout

The furlough scheme has been extended to March but that didn’t stop unemployment from taking a sizeable step up in last week’s data. Around 300,000 people were made redundant in Q3, roughly the same number as the worst point during the financial crisis, pushing the unemployment rate up to 4.8%. That’s still a relatively low figure compared with recent history, but the Bank of England expects it to keep climbing to roughly 7% in future months. Even at this early stage one regional trend is clear: one quarter of the fall in employment so far has occurred in London. But the labour market fallout is far from over.

Exodus

Unprecedented job support measures have undoubtedly played a part in the relative resilience of the UK labour market. But that isn’t the only factor at play. An exodus in foreign-born workers, triggered by the pandemic, has acted as a safety valve for ‘domestic’ unemployment. The number of foreign-born workers in the UK has fallen by almost 600,000 over the year to Q3 2020, with just one in six of these moving on to the unemployment register. Close to two thirds of the decline in foreign-born workers were from the EU, with most of these originating from EU8 countries. Seasonal or contract workers may not have been entitled to furlough and have instead left the UK altogether.

Dreich

Still feeling chirpy? Best stop reading now. Things turn gloomy from here. England’s lockdown 2.0 coincided with retail footfall falling to just a third of the level enjoyed on the same day in 2019. It had been 91% the day before. Shows what a tough call lockdown is. Sure, the recovery had slowed, and yet in September a slight majority of trading firms still reported increased revenues. That’s unlikely to be true today. Online job adverts fell in early November to around two thirds of the number posted last year, while traffic decreased 24ppts below that seen in February. November’s a maudlin month.

Waning

The latest monthly British Retail Consortium (BRC) survey adds weight to the view that the UK retail sector has lost momentum recently. Witness a softening in retail sales to 4.9% year on year in October, from 5.6% year on year in September. Still, households continue to rotate away from buying consumer services to household goods. The slowdown was driven by the adverse impact of the second wave of Covid-19 and the ‘circuit breaker’ in Wales on retail footfall. Now the second lockdown in England looks set to pressure the high street ahead of the crucial Christmas trading period.

Backburner

UK productivity rebounded from Q2’s slump following the reopening of the economy. But some measures have improved more than others. Output per hour worked rose 5.2% quarter on quarter and 3% year on year in the third quarter. Meanwhile, output per worker saw a 16.2% quarterly rise following the 21.1% plunge in Q2. The return of some furloughed workers (employed but not producing) was at play. But with thousands remaining on the Job Retention Scheme, output per worker remains almost 9% below Q3 2019 levels. Addressing the productivity challenge may be on the backburner as protecting jobs and incomes is a priority. But when the crisis passes the focus on productivity will return.

Mean reversion

The first wave of lockdowns seriously depressed global trade. Here in the UK, imports dropped by nearly one third in the second quarter of 2020. Now the effects are unwinding. The value of imports jumped by £17bn in Q3 as household spending rebounded, driving greater demand for goods produced abroad. Key to this was a recovery in car and clothing imports. British exports rose too, but not by the same margin. All this means the UK trade surplus – that rarest of things – narrowed to £4.2bn (excluding precious metals) in Q3 as a whole and disappeared entirely in September.

Another emergency

Covid-19 is winning all our attention this year. But despite this, we should not forget about another emergency that is unfolding – climate change. Andrew Bailey, governor of the Bank of England, said “… our experience with Covid has powerfully demonstrated our ability to adapt, which should give us all comfort that the task we face should be achievable”. Next year the BoE will run a climate stress test on financial companies. But climate is a global risk and we cannot insulate ourselves through domestic action alone – raising the importance of international initiatives and collaboration.

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