Those of us who follow with interest the Chancellor’s Budget speeches and spring/summer/autumn spending reviews (delete as appropriate) have grown used to the flexibility around the timing of these events. And so, in the era of the coronavirus, it came as little surprise that the man in charge of the nation’s purse strings felt that a period of a little under four months since the Budget was an appropriate juncture at which to provide an update on the health of the finances of UK plc.
The pandemic has caused significant economic harm, with UK GDP contracting by 25% over a period of just two months, and the IMF forecasting the largest global recession on record, both of which points were referenced by Sunak in his opening remarks. Given the obvious fragility of the economy, it was reassuring to see how unequivocal the Chancellor was about the top priority over the coming months, for the future of the economic recovery – and therefore for UK equity investors – depends to such a large degree on a single factor: employment.
The employment picture over the last few months has been far from clear. We have all grown used to the almost daily announcements of large-scale job losses within those sectors that have been most severely impacted by the effects of the pandemic. While the furlough scheme, along with other measures, has done much to safeguard jobs thus far, it does not take an economic genius to establish that it is not sustainable in the long term.
As such, businesses have been expecting the scheme to be withdrawn. The key focus of market and economic observers will now be on the reactions of companies to today’s announcements. Will planned redundancy programmes be paused, or will they even accelerate? Here are my initial thoughts on some of the key announcements, and what they might mean for the economy and businesses.
There is little doubt that unemployment will rise over the coming months; if this can be curbed to a meaningful extent, then the prospects for an economic and corporate profits recovery over the next 18 months or so could rise commensurately.
The various directly employment-related announcements in the Summer Statement are by no means unhelpful, and it would be churlish to suggest that the “jobs retention bonus” and “kick-start scheme” (supporting the return of furloughed workers to their old jobs, and the creation of new roles for 16-24 year-olds, respectively) will not go some way towards supporting employment levels. That being said, the stock market’s muted initial reaction can be taken as an indication that these will not be seen by investors as the answer to all of the nation’s economic woes.
The lifting of the stamp duty land tax (SDLT) threshold on property transactions from £125,000 to £500,000 is similarly welcome support for the all-important housing sector; while this will initially apply only until March 2021, investors will be eager to see if there is scope for it to be extended.
However, here again, the prospects for transaction volumes to recover meaningfully after they fell by approximately 50% in the month of May will depend to a much greater degree on buyer sentiment about job security than on a relatively modest SDLT saving. Unsurprisingly, shares in housebuilders reacted positively to the leak about this announcement on Monday, nudging ahead only a little more as the detail was confirmed.
There was relatively little new on infrastructure spending in the Summer Statement. Clearly – as with any measures with the potential both to create jobs and reduce the negative effects of human activity on the environment – the subsidy/voucher scheme to help improve the thermal performance of some 650,000 UK homes, combined with a £1 billion fund to enhance the energy efficiency of public buildings is to be welcomed. However, in the overall scheme of the policy response to the pandemic, these are very small measures.
The hospitality and entertainment sectors, along with travel, have inevitably been some of the worst hit by the pandemic. There is little doubt that the temporary reduction in VAT from 20% to 5% on everything from restaurant meals to cinema tickets to a stay in a B&B will be welcomed by this important economic sector and significant source of employment. Here again though, questions remain over whether such give-aways (at a cost of some £4 billion to the Exchequer) will be sufficient to entice a still-wary public back into the country’s pubs, restaurants and attractions. The market seems sceptical: shares in pub and restaurant operators (although fewer of the latter are quoted) barely moved.
Taken together, there is nothing “bad” about these announcements. Indeed, it is blindingly obvious that the economy and jobs market need all the fiscal and policy help they can get. As we engage with businesses over the coming weeks, we will be watching closely their reactions to these announcements. For the time being, however, the jury is somewhat “out” on the extent to which these measures can meaningfully dampen the coming rise in unemployment.