Economic Scar Issue

Scarring is part of the body’s natural healing process. The bigger the cut the longer it takes to heal, and the worse the scar. A small cut heals and gradually becomes unnoticeable over time. Scar tissue serves a great purpose but is usually of inferior functional quality.

Parts of the skin that are scared are less resistant to ultraviolet radiation, and sweat glands and hair follicles do not grow back within scar tissues.

SOMETIMES THE SCAR KEEPS GROWING, EVEN AFTER THE WOUND HAS HEALED

“Is the level of unemployment and the level of business failure such that there will be scarring effects because not everything will come back?”Andrew Bailey, BoE

The hit to the economy from this lockdown can be seen as short but the hit has permanent and longer-lasting consequences to consider. We will all emerge out of it differently shaped. And I don’t mean around the waist from a lack of exercise – or is that just me?

Unlocking the lockdown, there is literally no framework. And while expectations are that the economy should bounce back, what does business look like in the new normal and what does that mean for everyone in the country?

THE CHALLENGE

There are 3 major challenges that can lead to permanent damage:

1 Business investment lost or cancelled – Investment into UK companies has fallen dramatically in 2020. In the FinTech sector alone it is estimated that the total investment lost could be as much as £1.9bn.

2 Businesses failing – 21,000 more UK businesses collapsed in March than the same time last year, a 70% increase, according to Enterprise Research Centre. The number of new companies also dropped dramatically, by 23%.

3 Unemployed – people find it harder to get back into the labour market after being made unemployed.

UNEMPLOYMENT

Is the level of unemployment so much that there will be scarring effect? Chancellor Rishi Sunak has repeatedly said that the government cannot save every job.

Even before the lockdown began in March, employment had hit a record high as some businesses anticipated a downturn from the so-called “Wuhan virus”. Then in April unemployment jumped by 856,500 according to the Office for National Statistics (ONS). Claims for universal credit also hit a record level in the early weeks of lockdown. Some might think this is probably going to get worse before it gets better.

Unemployment gets the headlines but what is more interesting to me is the fact that job vacancies also fell massively – by nearly a quarter – to 637,000 in the three months to April.

So there are more people out of work, and the available jobs are shrinking rapidly.

UNDEREMPLOYMENT

There is also the curious puzzle of underemployment, which has risen too. According to the ONS, the total number of weekly hours worked last quarter was 12.4 million hours less than the previous year. There are two types of underemployment – those who would like to have more hours than they currently work and those who have had their hours reduced due to economic reasons. Right now it’s mainly due to the latter.

“Much more important to that is whether you have this effect of scarring of the economy. If the economy is permanently smaller then you get permanently less tax revenue.
Robert Chote, ONS

SCARING AND THE ECONOMY

The CBIL and BBLS loans support struggling companies and should hopefully preserve people’s livelihoods. But some sectors may be banished forever.

The restaurant sector, for example, is unlikely to be the same for a very long time, if ever again. It’s not about eating, it’s about social interaction, the atmosphere, the number of outlets, etc.

The impending recession will impact disposable income, social distancing and public hesitancy to gather in confined places a viable business even more difficult in a sector which operates on low margins.

 

“[It] does have to be tackled otherwise we will destroy people’s livelihoods and get the scarring that I was just talking about”.
Andrew Bailey, BoE

JOBS THAT DIDN’T EXIST IN JANUARY

As furloughed employees begin to return to work, the Great Unlocking will create jobs we’ve never seen before. There is already a demand for jobs such as social-distancing monitors on construction sites, and plexiglass installers for offices about to have a boom!

Commercial office spaces are unlikely to experience the same level of occupancy anytime soon but offices will need to have plans to check the temperatures of staff and visitors entering the building, helping to screen workers for signs of the virus. Some Banks in Canary Wharf will be adding doormen and elevator attendants to prevent too many people from pushing buttons, and opening doors. Larger firms are hiring lab workers for their own virus tests.

Another area is contract tracers. In Wuhan, the ratio is 81 tracers per 100,000 residents.

Every business will be looking to fill new types of roles with people responsible for preventing the virus from spreading. Unfortunately, these roles are unlikely to significantly offset the hundreds of thousands who have lost their jobs recently or millions who are already unemployed.

The good news is that there were an estimated 637,000 vacancies in the UK to April 2020. The other positive point to note from the ONS data is that real-terms earnings continue to grow despite the crisis and was estimated to be 0.7%.

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