AXA IM's David Page - UK reaction : Chancellor Sunak spells out fresh fiscal stimulus – more likely necessary

Chancellor Sunak addressed Parliament today introducing a package of measures worth an estimated £30bn (1.5% of GDP) to try and minimise the increase in unemployment – and the potential long-term impact on the economy – of the pandemic. The Chancellor broke down the measures into three areas – support, where he spoke about the next phase of jobs support as the government furlough scheme winds-down in October; creation, which included schemes primarily targeted at boosting construction and housing activity, and protection, which included measures to stimulate hospitality and tourism. The Chancellor suggested that this was “not just about economics, but values”. However, with government spending setting peacetime records in furloughing workers, this package is about the government providing stimulus to try and lift the economy and job creation, as the government evaluates the cost that the virus has created already.

Measures in Detail

Support for jobs, will include:

Jobs Retention Bonus – the government will pay a £1k bonus to companies that re-employ a furloughed worker by January (paying a minimum of £520/month). The Chancellor noted that if all of the 9.3m furloughed workers were re-employed this scheme alone could cost £9bn.

Kickstart Scheme – the government will pay the wages of 16-24 year olds put into new ‘decent’ jobs (25hr+/wk, paying at least minimum wage, including training) for up to 6-months. The Treasury has estimated the cost at £2bn, but has set no cap on this, so if the scheme is successful it could cost more.

Traineeships boosted – a slew of measures including increased apprenticeships, universal skills placements and 18-19 year old traineeship schemes

£1bn to Department for Work and Pensions in part to double the number of career coaches, with the aim of seeing “millions” back to work  

Job creation measures, will include:

• Green investment initiatives, including £2bn in subsidies for household energy efficiency improvement measures, £1bn investment to improve efficiency in public sector buildings, including schools and hospitals and £50m in a pilot project to decarbonise social housing
• Stamp duty cut. Stamp duty on properties below £500k will be dropped from today until 31 March in an effort to boost housing transactions. The Chancellor was not specific, but his explicit reference to people “buying a main home” suggests that this will not be available for landlords.

Protecting jobs measures, will include:

VAT rate cut for the hospitality, accommodation and attractions sector to 5% from 20% from 15 July to 12 Jan 2021, at an estimated cost of £4bn.

“Eat out to help out” – a 50% of Mon-Weds discount of bills up to £10/head in participating restaurants.

In normal circumstances a 1.5% of GDP fiscal boost would be a big policy measure. However, in the wake of the £160bn support provided so far, the scale of the figures is lost. We believe the intention of the government is correct. The furlough scheme could not stretch indefinitely and additional measures to try to quicken economic activity to create additional jobs is likely the most effective means to stop furloughed workers becoming unemployed over the coming quarters. It is important that these measures show continued fiscal stimulus and are not balanced by revenues raising measures. The Chancellor acknowledged that “over the medium term” the public finances needed to be managed in a sustainable fashion, however, with household surpluses increasing, an attempt to lower government borrowing now would likely push the economy deeper into contraction and risk deflation.

But will these measures work ? That is less clear. The Chancellor talked about the evidence suggesting traineeship schemes have been effective into reducing joblessness. However, it is not obvious that the £1k payment per worker associated with the Jobs Retention Bonus - will incentivise companies hiring decisions over and above the immediate outlook for their industries. The green construction initiatives looks like a good marriage of stimulus with valuable long-term direction, and should exhibit a high fiscal multiplier (feed through to the economy) where they are taken up. But the bulk of the measures are based on trying to bolster confidence. The cut in Stamp Duty attempts to re-charge the UK housing market – an idiosyncratically vital piece of the UK consumer mind set - echoes Chancellor Osborne’s 2013 mortgage guarantee scheme which helped to lift the UK out of the doldrums after the GFC. While the VAT cut to hospitality (and “eat out” scheme) should incentivise people back into the hospitality sectors. This could prove important in getting people back into the habit of social consumption after a four month break, without the inevitable ‘leakage’ of more generalised VAT cuts. This is designed to bolster household confidence to consume and business confidence to rehire. What is unknown is how successful this will be in overcoming the fears and uncertainties associated with the current, fading virus spread across the UK and future developments.

Our current outlook assumes that UK GDP will contract by 10.7% in 2020, expecting a whopping 20% contraction in Q2. We already assume a strong rebound in activity in Q3 and Q4 and our confidence in such an outlook rises on the back of these new measures, but will ultimately also be subject to as yet unknown virus developments. With this we are expecting to see unemployment rise to average 8.5% in Q4 – matching the GFC high and over double the current (artificially supressed) rate of 3.9%. However, estimates of US unemployment rose to 16-20% in April and illustratively if we considered that the 9.3m furloughed workers all lost their jobs, that would see unemployment rise to 24%. Our own outlook suggests that more work is likely to be needed over the coming year to cement the scale of recovery necessary to absorb this spare capacity. We suggest that while the Chancellor’s Budget this Autumn will take more comprehensive view of the public finances, more fiscal loosening is likely at that time. Moreover, with ongoing, debt-financed government stimulus, we believe the MPC is likely to see the need to extend its QE purchases beyond the additional £100bn sketched out until the end of this year to avoid a tightening in financial conditions and to stand a chance of getting inflation back to target over the next few years.   

Financial markets posted little reaction to the Chancellor’s announcement with many of the measures well trailed and their outcomes difficult to anticipate. Gilt yields remained stable at -0.09% in 2-year and 0.17% in 10-year areas – yields that in themselves are not suggestive of a quick recovery to normal conditions.