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U.K. Labor Market Outlook Is ‘Horrendous,’ Economists Warn

U.K. Labor Market Outlook Is ‘Horrendous,’ Economists Warn

(Bloomberg) --

The price the U.K. is paying for the coronavirus lockdown is becoming clearer as output shrinks at the fastest pace in decades and the government rolls out a borrowing plan that dwarfs the response to the global financial crisis.

The outlook for jobs is “horrendous” and the contraction could become the worst in several centuries, current and former Bank of England policy makers said on Thursday. A quarter of the labor market is already effectively out of work, and the government’s rescue program will force public debt to surge, reports showed.

U.K. Labor Market Outlook Is ‘Horrendous,’ Economists Warn

“Seeing the numbers in cold hard print and witnessing the depths of the reported falls in output is sobering,” said Victoria Clarke, an economist at Investec. “Whilst the evidence today highlights the depth of the contraction underway, the robustness of any subsequent rebound remains an open question.”

The economy’s ability to bounce back will depend on how successful the government’s programs are in keeping businesses afloat, and on how easy it is for those currently not working to return to their jobs.

Output contracted at the fastest pace in at least 20 years this month, according to a closely watched Purchasing Managers Index. That may still understate the damage, according to Bloomberg Economics’s Dan Hanson.

In a response that exceeds the one to the global financial crisis, the government is planning to raise 180 billion pounds ($222 billion) of bonds between May and July.

That will help Chancellor of the Exchequer Rishi Sunak fund the long list of support measures he’s put in place since the outbreak, including a commitment to pay a proportion of furloughed workers’ wages and emergency payments to struggling businesses. Prime Minister Boris Johnson has already kept the country on lockdown for a month now.

The number of people out of work in the U.K. is set to surge fivefold and the longer the lockdown persists, the more difficult it will be to get people back to work, according two leading labor-market economists.

What Bloomberg Economists Say:

“The direction of travel for the economy is clear. Our latest forecast is for a 2.6% drop in output in 1Q followed by a whopping 17% in 2Q. The PMI will be key in assessing how quickly the economy recovers as the containment measures are lifted.”

Dan Hanson, senior U.K. economist. Read full REACT

The U.K.’s effective unemployment rate -- including those who have been furloughed -- will rise to around 20%, according to a paper published by the National Institute of Economic and Social Research. The current rate is 3.9%.

“What is coming in the labor market looks horrendous,” said the paper’s authors David Blanchflower, a Dartmouth College professor and former BOE policy maker, and David Bell, a professor at the University of Stirling.

They said it will become a “tougher call the longer the lockdown persists” to get people back to work if and when there is a recovery, as that can only happen if firms are solvent and have a market to sell into. While British banks are ramping up lending, some businesses are still having trouble accessing the funds they need.

The Confederation of British Industry said an index of optimism among manufacturers plunged to the lowest on record in the weeks after the curbs were imposed. Order books are expected to keep shrinking and firms plan to slash investment.

With the government offering to pay 80% of workers’ salaries, about 27% of the U.K. workforce had been furloughed as of April 5, the Office for National Statistics said in a separate report. About a quarter of businesses had temporarily ceased trading, and furloughing was most prevalent in the accommodation, food services and construction industries, the ONS said.

U.K. Labor Market Outlook Is ‘Horrendous,’ Economists Warn

After cutting the benchmark interest rate to a record low and restarting bond buying, the BOE will set out new forecasts for growth and inflation at its May 7 policy meeting.

Governor Andrew Bailey said last week it’s reasonable to expect a 35% drop in economic output in the second quarter, and not all of the losses will be recovered. The central bank’s aim is to prevent too much long-term scarring, he said.

BOE policy maker Gertjan Vlieghe echoed those remarks, saying that we’re experiencing toe worst economic downturn in a century, “or possibly several centuries.”

Vlieghe defended the bank’s response in speech on Thursday, arguing that the coordinated approach with government isn’t compromising its independence. The aim of the policies are to get a V-shaped recovery, but the rebound will probably be slower than that, he said.

©2020 Bloomberg L.P.