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Can the Chancellor save the economy?

10 July 2020

The Brief - LGTV - Macro 10 July - 1200

Jonathan Marriott, Chief Investment Officer

As detailed in our The Summer Statement at a glance article, Chancellor Rishi Sunak has announced a further £30 billion of support to counter the impact of the pandemic. These actions are largely targeted at youth employment as the furlough scheme is due to wind down in October. The furlough scheme, combined with backing for the self-employed, has helped 11 million individuals across the UK, representing about a third of the working population.  We see similar numbers in the US, where the Paycheck Protection Program (PPP) supports 51 million jobs, as high as 84% of small business employees, and about 30% of the total workforce.  However, as these schemes unwind, it is likely that many of these jobs will be lost. This will have driven the Chancellor's actions earlier this week and will likely push politicians around the world to take further action in the months to come also.

For many businesses, the long-term impact of the pandemic will exceed far beyond the duration of these employment schemes. For example, many travellers are likely to be wary of flying for a long time, unless an effective vaccine can be found. We have already seen British Airways and Easyjet warn of mass redundancies and, this week, United Airlines warned staff that they would have to cut 45,000 jobs when federal support ceased. A more fundamental, long-term trend, accelerated due to the pandemic, is online shopping. The move to online shopping has been growing for years, but has recently received a massive boost as high street shops were forced to close their doors due to lockdown restrictions. Whilst many shops have now reopened, the trend away from the high street is unlikely to be reversed, particularly with social distancing measures and public transportation restrictions in place. This week, Boots announced the closure of 48 shops and the loss of 4,000 jobs. Similarly, John Lewis will close 8 shops, resulting in 1300 job cuts. Many retail spaces are already unoccupied in town and city centres.  Efforts to preserve the high street artificially by supporting retailers may be in vain, as the trend towards online shopping is here to stay. Landlords and town planners will need to think creatively about how to use these spaces, with more space allocated to leisure and residential use.

The cut in stamp duty on house purchases may help the residential property sector. This week's latest Royal Institute of Chartered Surveyors (RICS) survey has already shown a pick-up in activity with new buyer enquiries at the highest level in over ten years. The commercial sector is a much more mixed picture. If many people find that they can work from home, there is less demand for office space, however, if we continue to socially distance ourselves, we need more office space. Whilst the retail sector is suffering, warehouses for online sales and distribution will be in greater demand.

Boris Johnson talked last week of "build, build, build" as a way to get out of the recession.  Although investment in housing and infrastructure is welcome, there is a skills shortage in the building industry that needs to be filled. The latest announcement on traineeships may help bridge this gap, but I suspect is unlikely to fill it.  It is young people and the lower paid that have been hardest hit by this recession.  The UK is largely a service economy with many young people employed in the hospitality and leisure sectors.  While the reopening of pubs and restaurants has been well received, the cuts in the numbers of customers they can serve means many businesses are unprofitable. Unlike the non-food retail sector, hospitality can grow again when the pandemic passes.  Temporary support such as the cut in VAT and the "Eat Out to Help Out" scheme, while short lived, will be a welcome support.

There has been talk of the UK economy being hit harder than other countries because of the pandemic.  Countries less dependent on services and more on manufacturing may find it easier to recover, so this may be true.  The Chancellor's actions are welcome and it is clear that there will be more to come in the Autumn budget, if not before. He can save many parts of the economy, but some changes cannot be reversed.

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