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28 September 2020: Cast anchor

The latest brief from the bank’s chief economist.

Last updated: 28 Sep 2020 5 min read

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In the face of increased restrictions and signs of waning economic momentum, policy support is being dialled up, while data last week laid bare the mounting level of public debt as revenues decline and spending balloons.

Farewell furlough

The Coronavirus Job Retention Scheme comes to an end in October, and last week the chancellor announced a replacement policy. Furlough has been one of the biggest economic supports the government has used; together with its self-employed equivalent, it has cost over £50bn in the first five months of its operation. But from November, under the new scheme, wage subsidies will be less generous (with the government contributing up to 22%) and it will only apply to staff that are brought back into work for at least a third of their normal hours. A subsidy to short-time work then, but also a moment of truth to see how many jobs have disappeared over the summer.

Counting the cost

The chancellor didn’t give any estimates of how much this new scheme might cost, but we know that providing life support to the economy doesn’t come cheap. Central government is currently spending 33% more than it did last year and is collecting less in taxes due to lower activity, tax deferrals and some cuts. This leap in borrowing means that public sector net debt in the UK is now over £2trn, roughly the same as GDP. Incredibly, this is a slightly better fiscal position than the Office for Budget Responsibility projected in the summer. With the autumn Budget cancelled, it is not clear when we’ll get an update on those official forecasts.

Flash! Uh-oh

The slowdown is upon us. Speculation has been rife whether the UK’s rapid pace of recovery can be sustained into the autumn. Now the widely watched Purchasing Managers’ Index (PMI) surveys appear to confirm that, even before the government tightened restrictions, the pace of growth was decelerating across both manufacturing and services sectors. September’s flash composite reading dropped to 55.7; below consensus and down from 59.1 in August. There are signs of a further slowdown to come, too, with businesses’ growth expectations falling for a second month running, to their lowest since May.

Rowing back

In the most recent instalment of the Business Impact of Coronavirus Survey, the proportion of businesses that were trading had decreased from 97% to 84%. The reason is that the responses have been weighted to be representative of all businesses in the UK, including smaller businesses, which are less likely to have been trading. Businesses that had not permanently stopped trading were also asked about their risk of insolvency. Accommodation and food services has the highest percentage of businesses with a severe or moderate risk of insolvency at 24%, compared with 11% across all industries.

Slightly better

The reopening of the UK economy has seen a pick-up in consumer spending. But consumer confidence has remained pretty subdued. The GfK barometer of UK confidence unexpectedly climbed from -27 in August to -25 for September. That marked a post-coronavirus high but remains well below the pre-pandemic levels in Q1. Looking ahead, tailwinds for consumer confidence remain in short supply. The chancellor’s new Job Support Scheme will do little to ease concerns about an imminent surge in unemployment. More significantly, the spectre of six months of coronavirus restrictions and a rise in the number of infections don’t bode well for a pick-up in confidence anytime soon.

Offset

The eurozone composite PMI dropped to 50.1 in September, the second consecutive monthly decline and indicative of waning momentum in the recovery. Germany once again leads from the front with its strong manufacturing sector boosted by increased exports and a surge in new orders. However, it was offset by the renewed downturn in the service sector due to intensified virus concerns and ongoing social distancing measures. Across the pond, the US continues its steady recovery with its composite PMI at 54.4 and both sectors comfortably in expansion territory. Coronavirus continues to be the major concern for both regions with the US bearing additional political uncertainty.

The heat is on

Are you burning high-carbon fossil fuels? Almost 80% of England and Wales is using mains gas extensively for central heating. That needs to change, especially because over a year ago, the UK committed to a 2050 with net-zero carbon emissions. Schemes existing (Wales is working towards better homes since 2011) and new (England’s Green Homes Grant, July 2020) are key to keeping this promise. The Office for National Statistics’ Energy Performance Certificate (EPC) data shows that new builds are more energy efficient, insofar that the median estimated CO2 emissions and energy costs for existing houses are twice as high than a new one. Long road ahead but the right one.

Twin towns

As Brexit looms, it’s nice to harness the post-war practice of ‘twinning’ between German and British cities to compare our respective places. For example, British cities have generally seen faster population growth between 2010 and 2018 than their German ‘twins’. And while German cities tend to have older residents, they also have a higher share of non-native born. There are also more flats and fewer houses in the German twin. And of course, German cities tend to have more manufacturing jobs. Manufacturing employs 46% of workers in Salzgitter, Germany, compared with 10% in Swindon, Salzgitter’s ‘twin’.

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