Covid Hastens an Overdue Reckoning for U.K. Economy

(Bloomberg) -- There’s one message from the British government that’s been clear as the coronavirus rages again: the labor market is about to go through a shock not seen in a generation.

The truth is that the U.K. economy was overdue a reckoning. The pandemic has just exposed the cracks that were already appearing in the model that came out of the tumultuous overhaul of the 1980s.

From banks and retailers to hospitality, businesses that have underpinned the economy since the purge of heavy industry by Margaret Thatcher were already being upended by a shift in consumer behavior and automation. A record employment rate masked widening income inequality, cheap labor and a productivity rate that trailed most of the world’s advanced economies.

What will come out the other end depends on questions politicians and businesses are struggling to answer as Britain leaves the European Union’s single market and the pandemic reshapes the global economy.

“When you are at the bleeding edge of an economic revolution, it’s hard to see where the jobs are going to come from,” said Mark Price, former deputy chairman of department store chain John Lewis Partnership Ltd. who served as minister for trade policy in 2016 to 2017. “There will be increasing levels of unemployment unfortunately, but there will be new jobs too.”

Chancellor of the Exchequer Rishi Sunak scaled back wage support to focus on saving jobs that could outlast the pandemic. Speaking at the Conservative Party’s conference on Monday, he reiterated he couldn’t save every job, saying “the pain of knowing it, only grows with each passing day.” He said that his “ single priority” as chancellor “to create, support and extend opportunity to as many people as I can.”

“Hard choices are everywhere” in terms of getting U.K. spending and borrowing under control, he added.

Sunak’s decision not to extend a blanket furlough plan leaves unemployment headed for levels not seen since Thatcher implemented her shock therapy. Like then, the jobless number could exceed 3 million as the free market again decides which jobs live and die. 

That turnaround forged a nation riding a global wave of financial deregulation and flexible labor markets. But it also became dependent on services more than any other big economy in Europe, accounting for more than 80% of jobs compared with 72% in Germany and 78% in France. As a result, the U.K. suffered a deeper contraction at the height of the pandemic, and the recovery will take until at least 2023.

There are two dynamics at play, said Ian Cheshire, chairman of Barclays U.K. and former chairman of department store group Debenhams Plc: The “turbocharged” acceleration of irreversible trends already under way and the “asteroid” impact of Covid-19.

Much of the pandemic’s impact will be “transitory in some sectors,” Cheshire said, speaking in a personal capacity. “Looking at hospitality, for example, are bars dead? No, people are still going to want to go out. But are there some parts of the retail sector that are dead? Definitely.”

It’s many of the jobs that provided a lifeline in the 1980s that are being destroyed now. The fastest shrinking occupations over the past decade were government administrators, retail cashiers and bank clerks.

One third of U.K. bank branches closed in the last five years, according to consumer group Which. TSB Bank announced on Sept. 30 it would close a third of its branches and shed more than 900 jobs.

What Our Economists Say

“Sunak decided to shift support away from providing a safety net for the whole labor market toward protecting just those jobs that are viable in the current environment. The big risk is employers shun his new wage subsidy scheme rather than paying up for employees on reduced hours. A spike in unemployment as the economy begins its adjustment to a new normal appears inevitable.”

-- Dan Hanson and Jamie Rush, Bloomberg Economics. Read the full INSIGHT

Hospitality discarded the most jobs of any industry in the second quarter, almost 137,000 positions. Already in 2016, the British Retail Consortium estimated that at least 900,000 jobs could be lost by 2025 and 74,000 stores closed.

Yet that doesn’t mean many jobs won’t return, said Simon Wolfson, who runs British clothing chain Next Plc. Unlike the 1980s, when steel, mining and shipbuilding were abandoned, people will still want to go on holiday, eat out and get married, he said.

“Sadly jobs will be lost, but do not underestimate the flexibility and innovation deeply rooted in the U.K. economy,” Wolfson said. “No one should try and second guess where those jobs will emerge. The free market will determine whether they are in call centers, coding houses, warehouses, yoga studios or elsewhere.”

On the same day that TSB announced job cuts, supermarket Morrison’s said it planned to hire 1,000 people to work on fulfilling Amazon grocery orders. At British Airways, which is shedding 10,000 positions, former staff are getting work in the National Health Service, as Amazon, Yodel and UPS delivery drivers and in government jobs.

To critics of letting markets solely dictate winners and losers, the current crisis has made clear that the pre-virus model was broken for too many people.

Frontline workers who kept the economy going during lockdown—keeping hospitals going, delivering food and transporting goods—were also among the lowest paid. Death rates from the coronavirus were higher in poorer post-industrial regions. Part of Johnson’s electoral program was to “level up” the country through massive infrastructure spending.

One in 8 people with a job also lived in poverty before the pandemic hit, according to Dave Innes, head of economics at the Joseph Rowntree Foundation, an anti-poverty organization.

“We know that the recovery from the last financial crisis was associated with growth in insecure work,” he said. “So it’s one strategy you could take to allow more unemployment now, but if you’re going to do that let’s really make sure that the adjustment that takes place gets us into a better position.”

In the past decade alone, the shifting careers landscape has seen van drivers up there with software developers, administrators and financial managers in experiencing the biggest growth in job opportunities. Meanwhile, a review of the government’s own list of occupations identified shortfalls of nursing assistants, care workers, butchers and bricklayers.

Such trends could be used by companies and the government to “get ahead” and foster job creation, according to Cheshire, who was also CEO of retail group Kingfisher Plc from 2008 to 2015.

“If you take the analogy of what happened in the 1980s, you wouldn’t say I am going to go and open a few deep-seam coal mines now,” he said. “I would rather see investment in STEM, design and technology. The problem is you can’t predict where and what the jobs will be necessary.”

©2020 Bloomberg L.P.