Unemployment Forecast to hit 9.0% in 2021

- Unemployment to peak at 9.0% in 2021 says Capital Economics
- "unemployment rate rising to around 7.75%" - Lloyds Bank
- "there may be light at the end of the tunnel" - PwC

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UK labour market statistics released on Tuesday reveal the economy shed 164K jobs in the three months to September, a figure that was worse than the -148K a survey of economists were expecting.

The job losses were driven by a record high in the number of redundancies being made in the most recent period, which pushed the UK's unemployment rate from 4.5% to 4.8% according to data from the ONS, but economists warn this figure could almost double by next year.

The extension of the furlough scheme until the end of March as announced by Chancellor Rishi Sunak last week is expected to continue supporting employment as the economy awaits the chance to fully reopen once more.

From September, government support under the scheme was scaled back from 80% to 70%, with firms required to contributed 10% to the salaries of furloughed workers.

ONS BICS data suggests that the number of people on the furlough scheme fell by 600K in September.  Economists at Lloyds Bank have benchmarked this figure against the one month fall in employment seen across September (~60K) and conclude that around 10% of the people on furlough lost their jobs.

"Positively, it also indicates that ~90% of these people were potentially brought back by their employers in September," says Nikesh Sawjani, UK Economist at Lloyds Bank.

However, Ruth Gregory, UK Economist at Capital Economics says the extension of the scheme by Sunak will probably only delay inevitable job losses.

"Once removed in April, employment will probably fall back in line with GDP, suggesting that employment will fall by a total 6.0%, or 2 million and the unemployment rate will rise from 4.8% in September to a peak of 9% next year," says Gregory.

Gregory adds that September’s rise in the unemployment rate from 4.5% in August to 4.8% suggests that the previous scaling back of the furlough scheme took its toll.

The number of payroll employees has fallen by 782K since March with the larger falls being seen at the start of the coronavirus pandemic, according to the ONS.

However, the ONS reports vacancies have continued to recover in the latest period, but are still below the levels seen before the impact of the coronavirus pandemic.

Total hours worked - considered by some economists to be a key signal - is still low but showing signs of recovery. The ONS says between April to June 2020 and July to September 2020, total actual weekly hours worked in the UK saw a record increase of 83.1 million, or 9.9%, to 925.0 million hours. Average actual weekly hours worked saw a record increase of 2.7 hours on the quarter to 28.5 hours.

Despite the improvement, the hours worked is still said to be 12% lower than pre-pandemic levels:

It is disappointing to see the BBC use the meaningless unemployment rate ( due to furlough etc).The real signal is hours worked which are 12% lower than the pre pandemic period. https://t.co/JlE4zrCxkQ

— Shaun Richards (@notayesmansecon) November 10, 2020

Annual growth in employee pay continued to strengthen as more employees returned to work from furlough, but pay growth is still subdued as some workers remain furloughed and employers were paying less in bonuses.

The Average Earnings Index with bonuses included for September rose 1.3%, which is better than the 1.0% rise markets were looking for,

The Claimant Count - those looking for out of work benefits - rose by 29.8K, which is less than the 50.0K economists were expecting.

"Given recent lockdown measures likely to weigh further on firms' demand for labour, the UK labour market is likely to see a further deterioration in the coming months," says Sawjani.

Lloyds Bank sees the unemployment rate rising to around 7.75% by around the middle of next – a view supported by the latest vacancies data which shows that the number of unfilled jobs has fallen by almost 35% in the past year, consistent with weak demand for labour.

The ONS data shows between 1.0–1.5 million additional people are still "temporarily away from their paid work" since early March.

"There are, however, some tentative positive signs emerging in the labour market. Importantly, the number of people who are economically inactive has stabilised despite job losses, which suggests that the gradual relaxation of social distancing measures and the opening of schools has encouraged workers to seek employment. It also implies that the rise in the inactivity rate observed in the previous months is likely to be a temporary rather than a permanent phenomenon, and that scarring in the labour market is probably going to be limited," says Hannah Audino, economist at PwC.

PwC are more positive about the outlook of the labour market compared to the previous months.

"This is due to a variety of reasons including the re-introduction of the more generous furlough scheme, which is likely to reduce job losses until at least January next year, as well as yesterday’s positive news about a vaccine potentially being introduced later this year. The latter point means that businesses, households and the government will feel more optimistic about the future and plan with more confidence now that there may be light at the end of the tunnel," says Audino.