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London’s Economy Today – September 2021 editorial

UK furlough scheme ends today

After gradually reducing the amount of government support under the scheme since July, the Coronavirus Job Retention Scheme or furlough comes to an end on 30 September. At the end of July there remained 297,400 London employments on furlough despite the introduction of employer contributions to cover part of the cost of furlough in that month. This figure is significantly down on the level seen at the same time last year which stood at 905,800 employments on furlough.

Figure 1:

Looking at the most recently available data shows the continuing drop in those on furlough. Thus, from June 30 to July 31, the number of furloughed employments in London declined by 51,300, a fall of 15%. However, the decline in London during July continued to lag behind the UK, where furloughed employments declined by 18%. It also showed there was also a slower pace of decline in London during June, when furloughed employments fell by 18%, compared to 22% in the UK as a whole. London continued to have a higher take-up rate (at 8%) than any other UK region or country, where rates ranged from 4% in Wales to 6% in the West Midlands.

Take up rates also varied across London’s sectors with Accommodation & food services continuing to have the highest rate by sector (21%) although that fell 5 percentage points in the month. Take up also varied across the capital with Barnet, Brent, Hounslow, Newham and Redbridge recording the highest rates in London – all at around 10%. While, Wandsworth recorded the lowest take-up rate in London with 6% of eligible employees on furlough.

With furlough ending recovery from the
pandemic hits a bumpy patch

July’s monthly GDP estimate for the UK showed growth of just 0.1% month-on-month – the slowest pace since the economy contracted in January.

Some factors that held back growth in July look temporary. The ‘pingdemic’ surge in Covid cases and self-isolation looks unlikely to repeat, as isolation rules have loosened and Covid infections had slowed by the start of September. The UK is now seeing almost 40% fewer new Covid cases per day from a mid-July peak averaging almost 50,000. London’s improvement is even more emphatic, with average cases down over 60% from the July peak.

There are also tentative signs that London may outperform the UK average for growth in July and August. Several sectors that make up a larger share of London’s economy than the UK economy continue to do well, including IT, which grew 2%, and Financial services, which grew 1.8%. The 9% surge in Arts and entertainment activity across the UK may also translate to more of a boost in London. The Retail sector, which was weak in July at the national level, may have also seen more consistent growth in London than in the UK according to mobility data. The weekly increase in retail mobility from June to early September in London was almost double the pace for the wider UK. Card spending in London’s retail sector was also back to pre-pandemic levels by late July, though the inner boroughs are recovering more slowly (Figure 2).

Figure 2:

Yet some of the factors behind July’s disappointing growth may persist, creating risks for London’s recovery. Even before the current fuel supply disruptions, recent supply chain difficulties were reflected in August’s London PMI data, which showed that while businesses in London remain firmly positive about economic activity, they are seeing growing backlogs. The index for outstanding business stood at 53.3 in August, and the gauge of input prices was near record highs at 69.4. With supply chain issues potentially re-emerging whenever there are Covid outbreaks at large ports worldwide, the path of the recovery ahead may be more uneven. Meanwhile, as shown in our indicators section, consumer confidence also declined again this month, with sentiment among London’s households pushing back into negative territory after August’s strong reading. The detail of the survey also showed that households are becoming increasingly concerned about making ends meet as the winter threatens a sharp rise in the cost of living. These concerns already came ahead of the planned rise in National Insurance contribution at the beginning of April 2022, which would see a worker on £20,000 p/a paying an extra £130 a year. Fuel disruptions due to driver shortages may present yet more problems for the recovery. The build-up of challenges led Bank of England Governor Andrew Bailey to indicate yesterday that the Bank expects the UK to take until early 2022 to recover – a few months slower than projections last month.

Even as risks to the recovery grow, real-time employment data has proved more encouraging than the GDP numbers. HMRC payroll figures showed London’s economy gained nearly 52,000 jobs in August, representing a gain of 1.3%. This was even faster than the strong growth of 0.8% at the national level. Yet despite these strong gains, London’s payroll employment remains 1.8% below pre-pandemic levels (Figure 3), and we still expect the broader workforce jobs measure to take some time to recover fully.

Figure 3:

Mounting concerns about rising prices

Concerns are growing about rising inflation across the UK, with the risk of a serious squeeze from the cost of living over the winter. CPI inflation for the UK reached an annual growth rate of 3.2% in August – the fastest pace since 2012 (and more than 1pp above the Bank of England’s target of 2%), and a number of factors point to a further acceleration for prices in the coming months.

One key risk comes from rising energy prices. Global commodity prices are rising strongly, and natural gas prices are now double their levels in early 2021. This has led to increased prices further down the supply chain and is contributing to higher energy bills for UK households. The Ofgem default tariff price cap is set to rise over 9% in October as several smaller energy providers have been forced out of business by soaring costs.

Another risk comes from the wider supply chain disruptions, which are leading to higher input costs for goods. The fastest inflation in August was in restaurants and hotels, but this was mostly due to distortions from last year’s Eat Out to Help Out scheme. Excluding restaurants, the fastest inflation came in transport, where prices were up nearly 8% year-on-year. Higher fuel prices are combining with more expensive vehicles as a shortage of parts, especially semiconductors, drives up costs and create scarcity. Fuel delivery challenges and panic-buying in recent weeks could raise cost pressures further in transport.

Some of these risks should be mitigated for Londoners. The capital’s households are less exposed to private transport costs than across the UK on average. Data up to March 2020 show that a smaller share of Londoners’ spending goes towards their own vehicles, with a higher than average spend on public transport. Yet poorer Londoners face an acute risk of higher costs. Across the UK, the bottom 10% of earners devote more than double the share of their spending to housing costs than the top 10%, which points to the coming surge in energy bills hitting the least well off the hardest. This squeeze from the cost of living also comes as the universal credit uplift ends, furlough ends, the VAT cut for hospitality and restaurants ends and national insurance contributions rise in April 2022, sending taxes to their highest levels since 1950.

The Bank of England expects inflation to continue to climb in the coming months, reaching an annual pace of over 4% late this year, before easing back towards the 2% target across 2022. However, upside risks to this forecast now look to be growing. Supply chain issues are taking time to resolve and the Bank’s summary of business conditions points to increasingly widespread labour shortages, potentially driving up wage growth. Most of these factors should ease across the coming months, but a prolonged period of elevated inflation could translate into persistently higher inflation expectations, driving up wage demands and prompting a sharper monetary policy response that could slow the recovery. Financial market inflation expectations derived from bond markets are already around post-financial crisis highs and the latest survey by the Bank of household inflation expectations pointed to growing doubts about policymakers’ ability to contain inflation (Figure 4a and b).

Figure 4a:

Figure 4b:

Warnings about ongoing labour shortages

The ongoing labour supply shortages that have affected a number of industries and have been particularly noticeable in haulage continued in September, with, as noted, a number of petrol stations running short of fuel. Looking forward, labour shortages across sectors could continue for up to two more years according to a report from the CBI. In it they blamed the shortages on a combination of the COVID-19 pandemic and Brexit. Commenting on the report Tony Danker, director-general of the CBI said “labour shortages are biting right across the economy. These shortages are already affecting business operations and will have a negative impact on the UK’s economic recovery”. A survey for the ONS also found significant recruiting difficulties in certain sectors with 30% of hospitality businesses saying “that vacancies were more difficult to fill than normal. This compares with 13% across all industries”. They further observed that “businesses across all industries said that a lack of suitable applicants was the main reason for being unable to fill vacancies in late August 2021, with transport and storage firms the most likely to cite a lack of EU applicants specifically”.

Meanwhile, in September the government announced that checks on goods imports from the EU into Great Britain would be delayed until mid-2022. Under the new plans customs declarations and controls will come in on the 1 January next year as was previously planned, but safety and security declarations will not be introduced until 1 July 2022. The government said the delays were so that businesses could focus on recovering from the pandemic. Elsewhere, German statistics indicate that the UK will drop out of Germany’s top ten sources of imports for the first time since 1950, with it expected to drop to 11th place at the end of 2021. Import hurdles caused by Brexit have been blamed for the drop. Commenting on the data Michael Schmidt, president of the British Chamber of Commerce in Germany said many SME’s “can’t afford the extra burden of keeping up to date and complying with all the kicked-in customs rules, such as health certificates for cheese and other fresh products”.

Concerns about the risks faced by
London’s financial sector

The feed through of the economic shocks that London has experienced over the past few years continue to be felt with calls being made for policies to maintain London’s position in international finance. Thus, the lobby group TheCityUK warned that London’s position as a global leader in finance was at risk without tax, labour market and other reforms. They observed that London had seen a decline in its global share of a number of financial transactions such as cross-border bank lending, insurance premium-writing, pension and hedge fund assets. It called for increasing the speed and reducing the cost of skilled worker visas, flexibility in allowing international staff to work without a visa for up to six months. While, it further highlighted that financial services were taxed “considerably more” than some other rival cities.

Still the latest Global Financial Sectors Index by Z/Yen Partners in collaboration with the China Development Institute, which was published in September, showed the capital maintaining its second place in the ranking in the survey of leading financial centres behind New York, although the gap between their rankings widened slightly. Hong Kong and Singapore were in 3rd and 4th place respectively but the gap between them and London widened compared to the previous survey.

In a sign of the ongoing recovery from the pandemic Lloyd’s of London returned to profitability in the first half of 2021. Thus, aggregate pre-tax profits stood at £1.4bn in H1 2021 compared to a loss of £400m in the same period in 2020. Also, the Lloyds Bank Business Barometer for August increased 4 points to 41% in London, putting the capital as the third most confident region behind the North West and North East. However, the UK and London continue to face challenges beyond the ongoing pandemic and Brexit, with the disruption to global supply chains also being driven by the impact of the closing of the Suez Canal and problems at Chinese ports earlier in the year. This has led to warnings from retailers on the possible shortage of stock in the run up to Christmas. Meanwhile, concerns exist about the prospects for the indebted Evergrande Group in China and that any problems it has could impact systemic risks in the region’s financial system. GLA Economics will continue to monitor these challenges over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.