Coronavirus-induced business uncertainty has cost 730,000 Britons their jobs according to this morning’s labour market report from the Office for National Statistics (ONS).
Early estimates released today from the organisation show the number of UK employees fell by 2.5% in July compared with March. The quarterly drop in employment was the largest seen since May to July 2009 despite the government’s supportive measures this year.
The full effect on UK unemployment, currently sitting at 3.9%, looks likely to be revealed only when the government’s furlough scheme ends in October.
With the programme tiding over many businesses and employment contracts in the short-term, many are looking to the number of hours worked per week as a more accurate depiction of the virus impact on employment.
On this measure, the situation looks just as bleak. The ONS reported an 18.4% fall in total weekly hours worked in the UK between the first and second quarters of this year. This was the largest quarterly decrease since estimates began in 1971, with total hours dropping to their lowest level since September to November 1994.
Furlough transition is key
While the furlough scheme has helped to preserve millions of jobs so far, increased business costs, reduced demand, and cash reserves quickly running dry all have the potential to force firms into redundancies when the programme ends in October.
Despite a national jobs picture “materially better than we would have expected two or three months ago” coming into August, Bank of England chief economist Andy Haldane said the summer’s “questionable” numbers understate reality.
Forecasts had predicted a rise in unemployment of up to 9%, contrasting the sub 4% figure reported in the last two updates from the ONS. And while the Bank revised their prediction down to 7.5% for this year, dropping to 6% at the end of 2021, the broader concern is that many furloughed workers are living on borrowed time, with the scheme masking the full effect of the virus-induced jobs crisis.
On the ground, many firms are having to restructure their plans and prepare for post-pandemic business. Pret A Manger is one of the latest companies to ask staff to reduce their hours in order to save jobs. With footfall from office workers all but vanishing in some cases, the temporary 20% reduction in hours worked may give employees a lifeline in the short-term. But if trading continues to be weak the on-the-go chain may have to add to the 1,000 redundancies across 30 stores announced so far this summer.
For investors, it’s important to realise that Pret isn’t alone in this balancing act. Hanging onto staff isn’t just a moral decision - redundancies and rehiring costs often far outweigh any short-term pressure relief on the balance sheet. If companies are forced into lay-offs in the fourth quarter, it will mean broad stagnation in capital expenditure and growth plans put firmly on the back burner. Retail businesses will also have to contend with a consumer base struggling with lower disposable income and appetite to splurge.
It has never been more pressing for investors to make sure the companies in our portfolios have adequate cash reserves and, crucially, are communicating plans on how they plan to tackle the rest of the year and beyond. They may be forgiven for not being able to predict the immediate future or the extent of government intervention but, come Christmas, it will be all the more evident which firms took the opportunity to plan ahead now.
The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.