UK: What the Chancellor’s announcement means for the economy and sterling

Ahead of Chancellor Rishi Sunak's summer economic update today, we set out four key challenges he faces as we enter the Covid-19 recovery phase. And by far, the biggest out of the four is linked to jobs. Unemployment is on the rise as firms grapple with the challenging new, socially-distanced operating environment.

The Chancellor has opted against extending the flagship Job Retention scheme beyond October, and don’t forget that the state's contribution to wage bills will be gradually reduced until then. Clearly, removing such unprecedented government intervention in the labour market is going to bring about job losses. But the big announcement today is that the government will pay a £1000 bonus per employee that is brought back from furlough, and kept employed until January.

On the face of it this is a fairly generous policy. In the accommodation/food sector, one of the heaviest users of the furlough scheme, that would be enough to pay around a month of earnings, based on the average of 2019 weekly pay. Anecdotally, it also seems that those staff members being furloughed were often towards the lower end of pay brackets.

Will this change the course of the jobs market? Not entirely - clearly if you are a business that has either had capacity significantly reduced by the new safety measures, or have seen demand collapse due to changing consumer habits, it’s unlikely to save jobs when the furlough scheme is unwound. But nevertheless this scheme should at face value help cushion some of the blow for firms more widely, and it’s also worth noting that companies will get the bonus even if they’ve already brought staff back from furlough.

The other key takeaway from the statement is that by-and-large, tax cuts were avoided. As we noted in our previous piece, involuntary savings will have dramatically increased for many who have been more fortunate to continue earning through the crisis. If demand remains low now that the economy has largely reopened, then it is therefore more likely motivated by safety concerns rather than financial contraints.

Admittedly, the government has opted to cut VAT for selected industries, and more interestingly the government will cover 50% of restaurant bills through August (Mon-Wed) up to a maximum of £10 per person. This seems to be an evolution of the voucher scheme proposed over the weekend, and probably stands a better chance of luring people back out to hospitality businesses, as it eliminates the risk of the equivalent cash injection being saved rather than spent. That said, the size of this measure is, in reality, fairly small.

There was also a fairly sizable change to stamp duty (a property tax), although our feeling is that the housing market will continue to be dominated by concerns surrounding job security, despite this new government support.

In short then, there are some innovative policies in the Chancellor’s latest statement, although for markets this is not a huge intervention, at least compared to the big numbers everybody has become accustomed to. It’s unlikely the schemes announced will cost nearly as much as the £30bn (or roughly 1.5% of GDP) estimated by the Treasury.

It should though, at least at the margin, help cushion some of the turbulence in the jobs market over coming months. But more importantly, no amount of fiscal support can mask the fact that the UK recovery hinges almost solely on avoiding a return to repeated, widespread lockdowns.

Not only is it important to businesses, which will be looking for an operating environment that is as stable as possible until a vaccine or similar treatment is available. But consumer confidence in the safety measures is going to be absolutely key, and in many cases will probably be a bigger driver of spending over coming months than financial health.