The UK’s favourite habit is talking about the weather. But lately the economy has proved even harder to predict. So what’s the forecast for businesses, homebuyers, savers, investors and spenders?
‘The economy is bouncing back.’ ‘There’s a recession coming.’ ‘Don’t panic!’ ‘We’re all doomed.’ To say there are mixed messages about the UK economy right now would be an understatement. Read four different articles and you might see four opposing views, and even the raw data seems to disagree with itself. The Covid-19 lockdown has been an unprecedented crisis for the nation – what is known as a ‘black swan event’ – so when it comes to making economic predictions, all bets are very much off.
In short, it’s turbulent out there. Still, turbulence is a lot better than free-fall. Amid the doom and gloom there remains much optimism, along with plenty of real opportunities for homebuyers, businesses, investors and consumers generally. Here’s a summary of the current outlook and what it could mean for you.
Spending and income are down, but saving is up
Average UK income has fallen, due to furloughing and a loss of work for the self-employed, according to research by the Bank of England. The Bank also found that spending has reduced, even among households whose income hasn’t reduced. A number of factors may be behind this: low or zero travel costs (due to home working), less going out, less travel, and the incentive to save more in a time of uncertainty. Other studies have confirmed that the UK is saving more than pre-lockdown.
The dark side of this savings boost is that the money isn’t being spent where it used to be, leaving many businesses short of their usual revenue. This is highlighted by the fact that self-employed people are among the most likely to be in the 20% of Brits who are financially struggling as a result of the lockdown. The Bank itself has said that the UK’s recovery will depend on whether people feel ready to spend their hoarded savings.
Property market still bullish – for now
The property market, which was frozen for over a month from the end of March, bounced back with a vengeance due to pent-up demand when it was reopened. The recovery was also turbo-charged by the stamp duty holiday, which made buying a home significantly cheaper for many buyers (and so, ironically, pushed prices even higher). Now new research from FJP investment shows the scale of property demand among those with savings in the bank.
The firm surveyed what it calls ‘investors’, meaning simply anyone who has at least £10,000 worth of savings or investments, other than their pension or home (if they own one). It found that 24% of this demographic planned to buy at least one property during the stamp duty holiday. There is a logic to this – many of those with lots of savings may have them specifically because they are saving up a deposit – but it’s still a strikingly high percentage. Even more strikingly, the figure is 43% for those aged 18-34, reinforcing the theory that it is first-time buyers who are the prime movers here.
This is encouraging news for sellers higher up the housing chain, and for the market in general. However it still leaves a question mark over what will happen when the holiday ends. Unsurprisingly, 54% of the respondents wanted the government to extend the scheme beyond 31 October, its current end date. What happens to house prices after that is an open question. Much will depend on what happens in the wider economy – if it stabilises, so should house prices (indeed, they may keep rising). But if there are job losses, combined with the return of stamp duty, it could suck the air out of the housing market. Sellers should therefore be pragmatic at this time and not hold out for unrealistic prices.
Businesses still face an endurance test
Small businesses and self-employed people have had to take the brunt of the economic storm. Some eight in ten businesses have been deferring their income tax and VAT as permitted during this time, while half as many have resorted to using one of the government’s loan schemes. These schemes however are very much short-term sticking plasters, so much depends on how quickly these businesses can resume normal operations.
Early signs have in fact been promising. When lockdown measures were relaxed in August, economic growth rebounded to its highest level in seven years, according to the Purchasing Manager’s Index (PMI), a key measure of consumer activity. Although a short-term growth rate isn’t necessarily an indicator of things to come, it’s an important confidence boost for retailers and consumers alike. Other measures such as ‘Eat Out to Help Out’ are having a visible effect at kick-starting the UK’s service-based economy.
But, in the words of Duncan Brock, group director of the Chartered Institute of Procurement & Supply, ‘Any celebration is premature.’ The acid test will come when firms ‘move from the protection of furlough schemes to the harsh reality of job shedding,’ he said. Job-cutting did rise in August to the highest rate since May, with some employers anxious to streamline their costs before the end of the furlough scheme. More than 9 million jobs are supported by this scheme, which is due to end in October. The chair of the Federation of Small Businesses, Mike Cherry, said: ‘After months of measures to ensure job and business survival, the next stage is about how we can grow once again to aid business and job creation.’
Hiring is down, but employers are adapting
The biggest risk right now for the UK is a sudden wave of unemployment once the government support schemes end. Many employers are already bracing themselves by reducing the rate at which they are hiring new staff. Four in five recruitment firms are forecasting an income drop of 15-30% over the year, according to a survey by HSBC. Chloe Clift, head of professional services at HSBC UK, said: ‘Recruitment does tend to be a great barometer of what’s happening in the wider economy.’ However, IR35 legislation has also been blamed for the drop in recruitment, so the slump may not be wholly Covid-related.
The recruitment industry is one of the most vulnerable sectors in any downturn, but many businesses remain upbeat. Chloe said, ‘Some clients we have been speaking to have gone through a huge amount of change… They are now looking forward and saying who do we need to hire? It looks like clients are starting to look forward and look at growth opportunities.’
Perhaps even more vulnerable are those in the travel and tourism industry, where revenue is forecast to be down by £22 billion. According to the World Travel & Tourism Council (WTTC) this could put up to 3 million jobs at risk. However, such an outcome is unlikely to be accepted by the government (since it would cost more in the long term to have this level of unemployment) so some form of additional business support measures can probably be expected as the UK emerges from the shadow of Covid.
Though GDP fell by a staggering 20% at the start of lockdown, economists predict a bounce-back of at least 14% as the UK goes into autumn and schools reopen. Many businesses are back up and running, and with the exception of large-scale events like football matches, life is gradually returning to normal amid the various safety measures such as mask-wearing. As such there is every prospect of a steady recovery for those businesses that have made it to the end of lockdown intact, as the country’s willingness to spend shows little sign of being blunted. So the message the economy is sending out may simply be: hang in there.
A version of this article was previously published by Unbiased 3rd September 2020