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Simon French: Customers voting with their feet are making the case for furlough

Customers voting with their feet are making the case for furlough

Simon French, Chief Economist
Published: The Times 15/12/2021

For the UK’s hospitality industry, the cold winds of winter have turned decidedly icy. Cancelled Christmas parties – even in Westminster – and muted New Year celebrations are poised to send a shiver through the finances of bar, restaurant, and hotel operators. The UK’s year-end festivities are usually when full capacity and swelling margins provide a timely boost to hospitality business owners. Such events act to offset losses often made during the typical winter lull in trading. Early data suggests that news of the Omicron COVID-19 variant is already reducing footfall in our major town centres. Data from the trade body, UK Hospitality, for last week showed a 13% drop in trade and a 15% increase in cancellations, compared with pre-pandemic levels. This follows a consistent pattern – seen throughout the pandemic – of consumers drawing their own conclusions over the risks of social interactions. Many are not waiting to see whether there is an unofficial Plan C of harsher restrictions. They are voting with their feet. This leaves operators in this sector with an increasingly difficult backdrop. The recent end to the furlough scheme and start of Bounceback Loan repayments risk making this as challenging a period for the £60bn UK hospitality industry as any time since the furlough scheme was first unveiled last Spring.

Last week the British Chambers of Commerce (BCC) called for the reinstatement of business rate relief, the emergency VAT cut and direct grants that supported the hospitality sector earlier on in the pandemic. Those calls will extend beyond the BCC, and will only get louder, as England’s working from home guidance kicks in and businesses that are ancillary to offices and transport hubs feel the pinch. Lobby groups for the travel and events industry are already asking the Treasury to do more. Even if Omicron proves to be less severe than previous variants, its well-established transmissibility advantage over previous variants could lead to large numbers of Britons being forced to self-isolate regardless of whether they want to visit bars and restaurants over the holiday season.

This time around there is an added complication for hospitality operators. Ahead of the news of Omicron the hospitality sector – employing 7% of all UK workers – had rebounded strongly. OpenTable had been reporting bookings running 15% above pre-pandemic levels across the UK dining sector throughout the autumn. Such had been the scale of the rebound in demand that staff shortages had become the key impediment to growth. Yesterday’s jobs data for October suggested that there were 173,000 vacancies across the sector. This was twice the number of vacancies ahead of the pandemic. With household finances, at least in aggregate, in rude health and sitting on more than £200bn of additional savings there is plenty of evidence that when given the chance consumers are very keen to catch up on experiences foregone over the last two years. Laying off workers that may not be there when you need them again in a couple of months should Omicron-related disruption prove short-lived is a risky and potentially costly decision. This is a new experience for many hospitality sector employers who have grown used to a relatively ready supply of workers – certainly prior to the disruption to labour supply generated by a new, post-Brexit visa policy. With EU-born workers slow to return, and older workers considering both their propensity to work and the health risks, hiring managers cannot be blasé about cutting employees.

The government’s official line – at least at the time of writing this column – is that reintroducing furlough is not necessary under Plan B. This is nonsense. Furlough’s reintroduction and a wider package for the hospitality sector should be tied to consumer behaviour and the appetite shown by banks and other lenders to provide a cashflow bridge for otherwise profitable businesses. The risk is that a sharp, but temporary, decline in appetite to socialise in crowded venues over the winter destroys economically viable livelihoods. It is one of the reasons why some iteration of the furlough scheme is probably wise – at least whilst the world rolls out the COVID-19 vaccine programme and acts to reduce the risk of vaccine-evading variants. Back in March I concluded that having furlough as part of the UK government’s permanent toolkit to tackle economic slowdowns would probably be inevitable for political reasons and economic resilience. I have not changed my view. The German equivalent to the furlough scheme – Kurzarbeit – has been around in some guise for almost a century and has been modified to minimise fraud and perverse incentives – two of the criticisms levelled at the hastily-introduced furlough scheme. Something similar is probably in the mind of Chancellor Rishi Sunak and his officials as they consider their next move.     

Despite the fatigue that many politicians and taxpayers may feel with returning to pandemic economic support, the central question remains unaltered. Are the jobs that will be protected economically productive and viable as the COVID-19 pandemic eventually becomes endemic? If they are then the cost to the taxpayer remains lower than the alternative.

The different approach taken by policymakers in different countries over the last two years of the COVID-19 pandemic provides a timely guide. In the US where policymakers absorbed a sharp spike in unemployment rather than offer job protection schemes this decision has aged poorly – at least through a jobs lens – with 3% fewer Americans in work than pre-pandemic. This mismatch in the US labour market has helped fuel US inflation that hit 6.8% in November.

In the UK where the furlough scheme protected 1-in-3 jobs at its peak, payroll employment is now 424,000 higher that pre-pandemic levels. This is a picture replicated in the EU where income protection measures were even more extensive – employment is also back above pre-pandemic levels. Whilst things may change as the economy evolves, it appears like a considerably higher proportion of Americans have responded to a brief spell of unemployment by withdrawing from the jobs market – damaging the US economy’s long-term growth potential.

For many smaller companies in the UK hospitality sector, the Treasury’s judgement on furlough will mean the difference between survival and failure over the next few weeks. The stakes could not be higher.

Simon French

Economics & Strategy