An early end to furlough could spell trouble for London residents.
According to the UK Government’s latest announcement, the end is now in sight. With restrictions expected to be fully lifted by the 21st June, the economic recovery will be in full flow. Many people, including the Bank of England, are forecasting a short, sharp recession, with UK economic activity like a “coiled spring” ready to bounce back.
Even if this is the case (it likely is), a sharp bounce back in economic output is unlikely to be mirrored in unemployment trends. Take the previous recession for example; whilst the economic recession has finished by mid-2009, unemployment continued to rise for 14 quarters, stabilised for around a year, and then took a further 14 quarters to return to pre-recession levels. Unemployment in London had not fully recovered until 2015, seven years after the recession.
As attention turns away from the economic output recovery, the focus will be placed on how to help people back into the labour market. This is particularly relevant in London, where historically residents have always recorded unemployment rates 1-2 percentage points higher than the national average. As of December 2020, 15% of working Londoners were furloughed, the highest proportion of all UK regions.
The Government’s employment support schemes have clearly played a big role in fending off rises in unemployment so far. Yet, restrictions are not due to be fully lifted until June and the Coronavirus Job Retention Scheme (‘furlough’) is due finish at the end of April. The Chancellor is due to announce plans for continued employment support this week in the March Budget. His decision will be crucial for the employment security of many Londoners.
Unemployment forecasts produced by Volterra predict that in a worst-case scenario, where the furlough scheme ends in April, 87,000 Londoners could be pushed into unemployment as their industries have not been given enough time to recover. Typically, it is younger residents (16-24) who suffer the worst unemployment impacts during recessions. Yet the presence of the furlough scheme is different – 31% of those furloughed are aged 35-49, whilst many older residents (50+) are also currently benefiting from the scheme. Residents who are particularly at risk in London therefore include older residents (who are more likely to be furloughed), residents in west London boroughs surrounding Heathrow Airport which have the highest rates of furlough in the country, and residents working in at-risk sectors such as arts, entertainment & recreation and accommodation & food. In this worst-case scenario, the unemployment rate in London could rise to 11% by the end of the year.
In a more realistic scenario, we assume that the Chancellor extends the scheme until June 2021. Our forecasts predict that this would save 58,000 Londoners from unemployment and bring the peak London unemployment rate down to 10%. This would be 0.5 percentage points below the past recession’s peak (10.5%), but higher than the forecast national peak produced by the Bank of England (7.75%) to account for London’s higher unemployment rates on average.
The Prime Minister has recently set out his roadmap to the end of restrictions. The Chancellor must now follow suit. His plans need to ensure industries are given enough time to recover as restrictions are eased, helping to bring down unemployment rates and avoid scarring effects on the economy.