MNI INTERVIEW: Labour Market To Hamper UK Recovery-OBR's Bean

There is no guarantee the UK's official fiscal forecaster will revise up medium-term forecasts that are key for budget setting despite stronger-than-expected activity and investment data, a leading figure at the Office for Budget Responsibility told MNI, adding that the end of a Covid employment support scheme could push up unemployment by as much as a million.

While recent growth and inflation prints have suggested the UK economy is gaining momentum, Charles Bean pointed to concerns over shrinkage of the workforce, caused by a jump in early retirements and the departure of EU migrants, as well as to the likely rise in unemployment as Covid job support schemes are wound down. He noted though that the UK's productivity performance had been better than previously thought in recent years.

"There are too many outsiders who are assuming that we will revise up because the near-term output profile has indubitably been stronger and they extrapolate that down to the medium term," said Bean, a member of the OBR's Budget Responsibility Committee.

The OBR will start work in late summer or early autumn on its forecast roundfor the autumn budget, after cutting its outlook for this year's GDP growth in March to 4% from the 5.5% previously anticipated. It raised its expectation for growth in 2022 to 7.3% from 6.6%, while its forecasts for the following three years were 1.7%, 1.6% and 1.7%.

POPULATION DECLINE

It will be clearer by the upcoming round how many employees will flow from the Job Retention Scheme, which has provided employees not working with up to 80% of their incomes, into unemployment, Bean said, noting that a sharp pick-up in demand linked to the re-opening of the economy will create stresses as the workforce appears to have atrophied.

"It is even possible output can overshoot so you run into excess demand. On top of that, a key issue is that the labour force looks to be significantly smaller because of the reduction in migrant labour, something like half a million," he said.

One headline-grabbing estimate by former National Institute head Jonathan Portes and Michael O'Connor was that the population may have declined by as much as 1.3 million. While that figure has been revised down,labour force shrinkage is evident.

"That was deliberately an upper bound, an assumption" and the official data are suggesting the decline "is something that is closer to the half a million mark," Bean said.

"Also, we know that quite a lot of people have flowed into inactivity during the pandemic. Are those people going to come back into the workforce? Some of them will be older workers who take early retirement," he added.

END OF JOB RETENTION SCHEME

The Job Retention Scheme is being wound down from July, with government support first cut to 70% before it ends in September. Up to a million people could be added to the ranks of the jobless, as many of those doing no work for their employers may prove surplus to requirements, Bean said.

"We know that about half of the furloughed workers are in part-time furlough. So they are doing some work … If you think that there are about two million people at the moment on furlough, we don't know exactly … that means we might be talking about a million people potentially who might flow into the unemployment pool," Bean said.

While in its early stages furlough was dominated by younger workers, who might find it easier to change jobs and sectors, now age groups are much more evenly distributed. Older workers may be more reluctant to take jobs in sectors that are re-opening, such as hospitality, he said.

A more encouraging sign for the medium-term outlook is that it seems the UK's poor pre-pandemic productivity performance was not as bad as previously thought and concentrated in a couple of sectors.

"Real output looks a bit higher, so it all suggests the underlying real growth rate pre-pandemic was maybe a bit higher than we thought. That is something we are going to want to think about as well in taking a view about where potential output is because at the end of the day that is what matters. It is not scarring, it is our judgement on potential output," Bean said.