The weirdest recession to date…

The so-called Global Uncertainty Index hit a record high in 2019 before the word Coronavirus had even entered our consciousness. But the last 20 or so months have completely recalibrated the parameters of what uncertainty is. In the time since, businesses have had their worlds turned upside down and back again – things that they thought would never happen, did, and things they would have absolutely expected to happen didn’t – and have also therefore had to reset as well.

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Working 9-2: Why NI workers produce much less than their German counterparts

Dolly Parton famously sang about the grind of working 9-5 and the routine of stumbling out of bed, making coffee and battling the traffic five days a week. But the pandemic has turned that on its head and the routine of work has changed for many workers forever. It has shown that there is perhaps a whole new way to make a living.

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Cost of living squeeze to trump skills squeeze?

Northern Ireland’s labour market has truly weathered its biggest economic storm to date. Eighteen months ago job losses and a surge in unemployment (above 10%) were viewed as a ‘slam dunk’ outcome. Not so. Fortunately unprecedented actions by the UK government, not least the introduction of the Job Retention Scheme, prevented a pandemic turning into an economic depression. The Job Retention Scheme served the economy well by retaining jobs during the lockdowns and throughout the worst stages of the pandemic. Following a vaccine rollout and a lifting of restrictions, the so-called furlough scheme expired on 30 September. As of the 31 August, the latest data available, there were still 29,700 jobs on furlough with a 50:50 split between full and partial furlough.

For those individuals still on furlough last month, the prospects of finding a job, albeit not necessarily the exact or ideal job sought, couldn’t be better. In 2020 labour market concerns focussed on the potential for massive job losses. Fast forward to autumn 2021 and the unemployment rate, currently 4.1%, isn’t and won’t be a cause for concern. Similarly, Northern Ireland’s payrolls data (excludes self-employed) returned to pre-pandemic levels in June 2021 with record employment levels in each of the last four months to September 2021. Granted this figure is flattered by the 29,700 individuals on furlough. It remains to be seen what proportion of these migrate to employment, unemployment and economic inactivity in due course. Nevertheless, Northern Ireland has experienced the largest payroll growth, relative to pre-pandemic levels, of all the UK regions. However, Northern Ireland has also experienced the steepest fall in self-employment (-31%) within the UK.

For those individuals still on furlough last month, the prospects of finding a job, albeit not necessarily the exact or ideal job sought, couldn’t be better. In 2020 labour market concerns focussed on the potential for massive job losses. Fast forward to autumn 2021 and the unemployment rate, currently 4.1%, isn’t and won’t be a cause for concern. Similarly, Northern Ireland’s payrolls data (excludes self-employed) returned to pre-pandemic levels in June 2021 with record employment levels in each of the last four months to September 2021. Granted this figure is flattered by the 29,700 individuals on furlough. It remains to be seen what proportion of these migrate to employment, unemployment and economic inactivity in due course. Nevertheless, Northern Ireland has experienced the largest payroll growth, relative to pre-pandemic levels, of all the UK regions. However, Northern Ireland has also experienced the steepest fall in self-employment (-31%) within the UK.

You may recall that after the Global Financial Crisis unemployment didn’t rise as high as initially anticipated. That was because pay restraint and falling real wages (i.e. wage increases below the rate of inflation) did the heavy lifting in the labour market adjustment.  If pay hadn’t fallen unemployment would have been even higher. There was a sustained period from 2011 – 2014 when UK inflation exceeded average earnings growth which squeezed household incomes. From 2015 onwards the incomes squeeze receded and eventually reversed with real earnings rising again (i.e. wage growth exceeding inflation).  Those on the lowest earnings have benefited significantly from the substantial increases in the National Minimum Wage. 

We are now back in that same place with the ‘cost of living crisis’ phrase appearing with increasing regularity. Inflation (UK CPI) looks set to exceed 4% in the coming months and could well test the 5.2% peak that occurred September 2008 next Spring. While skills shortages in some sectors (e.g. HGV drivers) are experiencing inflation busting pay rises that is not the norm. With the average pay packet likely to rise by 2-3% over the next 12 months or so that will fail to keep up with inflation. As a result, real incomes and the purchasing power of the pound in your pocket will fall. 

As in the last cost of living crisis that started a decade ago, Northern Ireland will be more exposed than other UK regions due to its higher concentration of low paid jobs. Higher inflation is not the only headwind facing households and local businesses. Next April will see the planned hike in National Insurance Contributions come into effect. The combined inflationary and tax squeeze will impact consumer spending and those sectors reliant on it.    

Recessions in the 1970s and 1980s focussed on the unemployment rate as the key metric determining how painful economic conditions were. Simply having a job invariably provided a guarantee against poverty.  But as we saw in the last cost of living crisis, having a job doesn’t necessarily protect a household from poverty. Despite unemployment remaining at historically low levels, in work poverty is expected to rise in the months ahead. For many, an increasing share of the pandemic savings may now be required for utility bills rather than to assist a consumer led recovery. Rates of pay and inflation will be the most closely watched statistics over the next 6 months or so. Whereas focussing solely on the unemployment rate is so last year.


Recovery summit in sight but is it a false peak?

Two weeks ago NISRA’s Index of Services and Industrial Production surveys for Q2 2021 revealed that economic output was closing in fast on its pre-pandemic level. For example, manufacturing output was less than 1% below the pre-pandemic level of Q4 2019 while private sector services was just over 1% below the same benchmark. Today we got a more complete picture with the release of the Northern Ireland Composite Economic Index (NICEI) and the Index of Construction for the second quarter.

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Finishing line in sight…or is it?

When measuring performance it is important to know what success looks like. It is also necessary to have suitable benchmarks to measure progress along the way.  As far as the economic recovery is concerned, getting back to pre-pandemic levels of output, activity and employment satisfies both these criteria. Earlier this week we saw that the number of employees on Northern Ireland payrolls hit a record high for the third month running having eclipsed pre-pandemic levels of employment back in June. On the face of it this looks like mission accomplished until you consider that this is flattered by furlough with 36,100 on the Job Retention Scheme as of the 31 July 2021. Furthermore, focussing on only one measure of labour market success can ignore huge failures in other areas – e.g. self-employment is down over one-quarter from its pre-COVID-19 levels.  

So what about output? How is it faring? 

It is perhaps worth rewinding back to what the output figures were showing over the last year or so. 

2020 was a year of extremes. Record rates of decline in Q2 followed by record rates of expansion in Q3. Lockdown restrictions had the effect of turning economic activity off and on. But as the pandemic progressed, subsequent lockdowns have been less severe on economic activity than the first. Many businesses have been able to adapt and function throughout lockdowns or pivot into new markets. All sectors with the exception of construction saw steeper peak-to-trough declines in this recession than the one that followed the Global Financial Crisis (GFC). The trajectory of economic output has largely followed a bungee jump. The initial fall and rebound being the most extreme, but subsequent declines and rebounds will moderate. For example, Northern Ireland’s private sector output fell by only 2.3% q/q in Q1 2021 – a period of lockdown – which compared favourably with the massive 19.5% quarterly contraction in Q2 2020 (Lockdown 1.0).

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Flattered by furlough… a jobs rewind beckons?

Lockdowns prompted a pause in the labour market with Rishi Sunak rolling out the safety net that was the Job Retention Scheme (JRS). With the play button then hit as many sectors went back to work. In more recent times, we’ve seen a fast forward in the labour market figures, with the number of payrolls rising for nine consecutive months and hitting a record high for the third month running in August. We may well see this trend continue in September. But with the furlough scheme ending in a couple of weeks, we know it isn’t going to be a straight-line recovery from there. The Jobs Retention Scheme has flattered the jobs figures.  But we’re now moving to a new stage of the recovery, a stage where stimulus is being turned off, inflationary headwinds are intensifying and the increased burden of tax rises is due to be felt from April 2022. We may well therefore see something of a rewind in the jobs data in the next few months as the labour market adapts to the post-furlough world. Don’t be surprised if we see payrolls fall back below pre-pandemic levels before the year is out.  Getting back to pre-pandemic levels of self-employment and hours worked will take quite some time.

So, what is the latest batch of labour market statistics from NISRA telling us?

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Survival of the richest…

Recessions traditionally follow a standard playbook – a fall in output followed by a lagged rise in job losses and unemployment, triggering a decrease in consumer spending, hitting retail sales and the housing market.

The COVID-19 pandemic though spawned a new recessionary variant. The UK economy posted its biggest slump in output in over 300 years. Yet a comparable rise in unemployment did not occur. Similarly, a fall in house prices was viewed as a ‘no brainer’ but it too did not occur.

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Are we there yet?…Yes and No

One of the key questions asked in any recovery is ‘are we back to where we were before the downturn struck?’ For the most recent recession the crucial benchmark is pre-pandemic levels / rates of activity / employment etc.  The latest batch of labour market statistics from NISRA highlights further improvements on the road to recovery.  But in response to the question ‘are we there yet?’ as far as the labour market recovery is concerned, the answer is both yes and no. It all depends what aspect of the labour market you focus on. For example, Northern Ireland’s economic inactivity rate (25.9%) has returned to pre-pandemic (Q4 2019) levels but the employment (71.1%) and unemployment rates (3.8%) have not.  

The most closely watched monthly labour market statistic is the HMRC PAYE payrolls data. This is a timely indicator of how many employees are on employers’ payrolls. As lockdown restrictions have eased there has been a marked increase in employee numbers. Indeed, June’s figures eclipsed the pre-pandemic payrolls high that occurred in February 2020. July witnessed the largest monthly jump in payrolls (+7,927 or +1.1%) since the series began, taking the total number of employees to 762,596 – a fresh record high.  That is up 27,000 employees from November 2020’s pandemic low and 9,600 (+1.3%) above February 2020’s pre-pandemic high. 

So are we there yet? As far as payrolls data is concerned it is a resounding yes and some! However, there is a statistical wrinkle here that inflates the true measure of employment and the amount of work being undertaken. The payrolls data includes staff who have been furloughed (i.e. availing of the Job Retention Scheme) but many of whom are still doing no work whatsoever. As of the end of June there were 44,000 employees on furlough. The current figure will be even lower as the scheme nears its September expiry date and more employees return to work as lockdown restrictions ease. Nevertheless a proportion of these employees will ultimately move into unemployment / economic inactivity. How many remains to be seen.

The encouraging news that the number of payrolled employees has never been higher is tempered by dismal news on the self-employment front. The number of self-employed fell to 91,000 in Q2 2021 – a 22-1/2-year low.  That’s down 46,000 or 34% relative to pre-pandemic levels. Many self-employed have switched status or jobs and become employees.  However, overall employment (employees + self-employed) in Q2 2021 remained 3.0% below pre-pandemic levels which equates to 26,000 fewer individuals in work. The self-employment and furlough issues also explain why the total number of hours worked in Northern Ireland is still recovering but not yet recovered. In Q2 2021 the total number of hours worked in Northern Ireland was 5.5% below Q4 2019 levels (pre-pandemic). That means just over two-thirds of the decline in total hours worked following the pandemic has been recovered so far. Only when this statistic returns to pre-pandemic levels can we be more authoritative that the labour market has truly recovered in a meaningful way. In the meantime, skills shortages across the length and breadth of the economy represent one of the biggest challenges facing employers in the months ahead.

Overall, Northern Ireland’s labour market statistics are showing several signs of improvement. Payrolls data may have returned to pre-pandemic levels but several indicators have a very long way to go before we can declare mission accomplished i.e. all labour market indicators return to pre-pandemic levels. 

So what is the latest batch of labour market statistics from NISRA telling us?

Ticking-up – 2020 was a record year for redundancies and some of those proposed job losses are continuing to land in 2021 with 700 during the second quarter. That compares with almost  1,100 in Q1. July saw 250 redundancies following 300 in June. Proposed redundancy numbers jumped (+73%) from 490 in June to 850 in July, marking the highest number of proposed redundancies in 10 months. One-in-four of these proposed redundancies were in manufacturing with a similar proportion within the wholesale and retail trade sector. These level of redundancies remain well down on last year’s levels.

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The Great Resignation … why firms are seeing such a high staff turnover

2020 was a profound year for the economy at a global, national and local level. 2021 is also set to be an unusual year for the recruitment market too. Rather than the expected mass redundancies, economies around the world are seeing record numbers of vacancies. What is clear is that the pandemic hasn’t had the impact on the labour market that was expected. Talk of double-digit unemployment has been wide of the mark.

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