The investment community agrees it would be churlish to knock the fresh fiscal stimulus unveiled yesterday by chancellor Rishi Sunak, while adding that much more needs to be done to stem unemployment. 
The stimulus is intended to shore up the UK economy – which contracted by 25 per cent over just two months – and prevent spiralling unemployment when the government’s furlough scheme ends in October.
In his summer statement yesterday – also dubbed the mini-Budget - Sunak (pictured) said: “We have taken decisive action to protect our economy. But people are anxious about losing their job, about unemployment rising. We’re not just going to accept this.
“So, today, we act, with a ‘Plan for Jobs’. Our plan has a clear goal: to protect, support and create jobs.”
Among the measures announced were a payment of £1,000 for each member of furloughed staff that companies retain, a £2bn “kickstart” job creation scheme for young people, a £5.6bn infrastructure package, a £2bn green homes grant, lifting the stamp duty threshold from £125,000 to £500,000 until March 2021 and a six-month VAT cut for the hospitality sector.
Columbia Threadneedle Investments global head of asset allocation Toby Nangle noted that the coronavirus crisis has left Sunak with three main macroeconomic issues to tackle: a profound economic contraction with some facing widescale bankruptcy; a fast-approaching job-loss cliff; and, a very uneven household savings landscape.
“The new measures announced glance in the direction of the first two features but lack the ambition required to address them, whilst the third feature went entirely unaddressed,” Nangle said.
“But with government support currently in place, the chancellor may still have time on his side before returning to the dispatch box for the Autumn statement. Without an Autumn follow-through, this package of measures looks insufficient to move the dial.”
The new measures could inject up to £30bn in stimulus into the economy – depending on the extent of take-up by businesses and households, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Mini-budget fiscal support
Source: Pantheon Macroeconomics
He estimated that the effects, which will be concentrated over the coming three quarters – could equate to about 2 per cent of GDP.
“Nonetheless, we still expect GDP to hover about 5 per cent below its pre-Covid level at the end of this year, due to further job cuts, high levels of household saving and the continued imposition of measures to keep the virus at bay,” the economist said.
“We think the chancellor will need to return to stimulating the economy again in the autumn. For a start, yesterday's new money will not fully fill the void when the [Coronavirus Job Retention Scheme] and the Self-Employed Income Support Scheme end. These two schemes cost the Treasury £33bn in Q2 alone.”
Richard Buxton, head of strategy, UK alpha at Jupiter Asset Management, said the future of the UK’s economic recovery depends largely on employment and it was therefore “reassuring” to see Sunak put this at the top of his priorities.
He described the various employment-related announcements in the mini-Budget as “by no means unhelpful” as they will definitely offer some support to the UK’s employment situation.
“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,” Buxton said.
Looking at all of Sunak’s announcements yesterday, the manager said there is nothing “bad” about the package as “it is blindingly obvious that the economy and jobs market need all the fiscal and policy help they can get”.
However, he added: “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.”
UK quarter-on-quarter growth and rolling three-month growth, %
Source: Office for National Statistics
Ed Smith, head of asset allocation research at Rathbones, is another who thinks that yesterday’s stimulus will not be enough to prevent the UK economy from being severely damaged.
“We would have preferred some more targeted measures and not these types of Polyfilla policies,” he said.
“Because Covid has been a highly unusual mix of supply and demand shocks that will continue to affect different sectors in very different ways, there is evidence to suggest that untargeted stimulus – such as the job retention bonus – may be far less effective.”
Smith concluded that there are five reasons why the UK recovery could still lag behind other countries’, despite the latest intervention:
The first is Brexit. “No more than a bare-bones free trade agreement is likely, and even that will drag on the economy, particularly if agreements on trade in services is kicked into 2021 or 2022, after current agreements end, which is looking very likely,” he said. “Ongoing uncertainty in services and no-deal uncertainty over the next few months could hold back business investment – and business investment has been held back hugely since the vote to leave compared to other countries.”
The second is the fact that private consumption, and in particular spending on consumer services, in the UK is a larger proportion of GDP relative to most other economies, aside from the US. Survey evidence suggests expectations for the service sector are more depressed in the UK than elsewhere.
Meanwhile, data such as Google/Apple mobility trends, or GfK consumer confidence surveys show the UK consumer is a little more fearful than those elsewhere.
“The hardest-hit sectors have had declining gross operating surpluses for some years now and have taken on more debt than other industries too,” Smith said, explaining the fourth reason. “That’s not a happy combination.”
This leads to Smith’s fifth reason why the UK could still lag behind: unemployment could move a little higher and prove a little more persistent than in other countries, as furloughed staff end up becoming unemployed when the government schemes end.
“Fiscal policy so far has concentrated on trying to save jobs, but yet unemployment has likely shot up to around 8 per cent, looking at the claims data. That’s a less successful outcome than Germany or France, for example, who have tried the same approach,” he finished.