While the advent of ‘Freedom Day’ may have had many UK residents thinking the worst of the COVID-19 pandemic has passed, the end of support measures around the world over the next three months could cause fresh turbulence in the economy as many effects of the 2020 crash begin to resurface.
The first key deadline already passed this month with the tapering of the UK government’s furlough scheme before it finally ends altogether on September 30.
At the end of April, around 3.4mln UK workers were still on furlough, and while the unlocking of most of the economy may have reduced the figure since then, a large portion could still be on the scheme and present a possible shock to the labour market when the payments finally end.
“If jobs are not back…by July 19 then are they really coming back? Furlough papers over the damage really, ending it could be painful”, said Neil Wilson at Markets.com
A post-furlough jump in unemployment, coupled with plans to end the GBP20 weekly top-up of the UK’s Universal Credit payments at the end of September, could rattle an already fragile economy coping with a growing shortage of staff caused by the twin pressures of a post-Brexit lack of migrant workers and the ‘pingdemic’ of self-isolating employees.
Business rates relief to taper, stamp duty holiday to end
Meanwhile, business rates relief is due to taper from the end of July from 100% to 66% until March 2022, which while not a total cut off could spell bad news for struggling businesses hoping to keep their premises afloat through the exemption.
The looming return of business rates has become even more worrying after a report from the Bank of England‘s (BoEs) Financial Policy Committee (FPC) warned that small and medium-sized businesses (SMEs) had been “substantial” increases in debt and many could be vulnerable to increased costs.
The housing market, seemingly one of few beneficiaries during the pandemic, could also see its momentum curtailed as the stamp duty holiday on property purchases ends in September following its previous threshold reduction to homes sold for up to GBP250,000 from GBP500,000 previously.
With this in mind, the government may see its tax revenues lifted again by the end of relief measures, however, the removal of support could cause the very businesses and transactions that generate those taxes to hit the buffers, a particularly grim scenario given that the government’s departments are facing GBP10bn of “unfunded spending pressures” on average over the next three years, according to a report from the Office for Budget Responsibility (OBR).
These fears seem to have already reached the heart of Whitehall, with Chancellor of the Exchequer Rishi Sunak reportedly considering pushing back the annual UK Budget to next year in order to closely monitor the impact of the withdrawal of support measures and the post-lockdown wave of COVID-19 infections currently sweeping the UK.
Interest rate hikes could tighten the screw
Despite the economic risks presented by the end of support measures, inflation appears to be dominating many macroeconomic conversations, as well as the prospect of interest rate hikes to prevent price increases from running out of control.
The debate resurfaced earlier this month when data showed UK inflation reached a three-year high of 2.5% in June, intensifying calls for rate hikes despite the BoE’s governor, Andrew Bailey, playing down prospects for an imminent increase.
A rise in rates would likely increase the cost of servicing the already large amount of debt swirling around the economy, particularly among the aforementioned SMEs, however, the Treasury may be hankering to bring inflation under control as certain pledges, notably the triple-locked state pension, are likely to see billions in extra spending added due to being tied to inflation rates.
This issue has also been thrown into sharp relief by the government’s latest borrowing figures, which saw a record jump in the state’s interest payments to GBP8.7bn in June as a result of inflationary pressures.
The decision for the BoE may therefore morph into a trade-off, pile the pressure on businesses servicing debt by raising rates or tighten the screw on the state by keeping rates low and risk continued high inflation.
Inflation may just be a distraction
However, according to some analysts, the concerns about inflation are merely a distraction from the more fundamental economic instability that could occur if support measures are withdrawn too quickly or if the UK suffers a particularly bad third wave of infections.
“The focus on CPI/inflation…and the recovery in earnings has perhaps obscured the risks of a Q3 slump, with risk potentially hitting an air pocket if support measures are withdrawn too precipitately”, said IG chief market analyst Chris Beauchamp.
“We are of course assuming that all will be well post [reopening on] 19 July… [but] if things do turn sour fast enough the support measures might just remain in place…it’s something we can’t afford to dismiss, particularly with market volume picking up as the summer ends and the risk of a sudden drop increasing as a result”, he added.
Storm clouds gather across the Atlantic
Meanwhile, on the other side of the Atlantic, the US economy is facing a similarly precarious economic situation as support measures are withdrawn over the next three months.
A federal moratorium on evictions, which has kept many Americans with a roof over their heads despite becoming unemployed or otherwise incapacitated, is due to end on July 31 and could potentially trigger a homelessness crisis as well as a dearth of empty properties across the US and a resultant drop in property values.
A moratorium on mortgage payments is also due to expire on the same day, possibly sparking a wave of foreclosures eerily similar to the 2008 sub-prime mortgage crisis.
The US is also tackling its own inflation concerns, with the consumer prices index (CPI) hitting a 13-year high of 5.4% growth in June and adding pressure for rate hikes on Federal Reserve chair Jerome Powell.
Further down the line, a suspension on repayments of federal student loans, which amount to a debt pile of over US$1.5 trillion, is due to end on September 30, potentially taking out a large chunk of consumer spending that during the pandemic had been used on household spending rather than debt servicing.
Despite calls from some politicians in Congress to write off large portions of the debt, political progress may be too slow to stop the resumption of payments in the Autumn, which in turn could set off a wave of delinquencies and see one of America’s largest debt bubbles finally burst.