How will the end of the UK furlough scheme impact GBP/EUR?

• UK unemployment has risen to its highest level in over two years as the coronavirus pandemic starts to take its toll
• The UK government’s furlough scheme has saved jobs, but millions could be at risk once the furlough scheme ends
• This could weaken the UK’s recovery relative to European counterparts, which have largely extended their job-saving schemes until at least 2021
• This may weaken the UK economy and place pressure on GBP/EUR, especially with Brexit still up in the air

The coronavirus and the lockdown measures that have paralysed the economy have started to take their toll on the UK job market, but the worst is yet to come.

The latest data from the Office for National Statistics (ONS) shows that there were 695,000 fewer people in employment in August compared to before lockdown measures were introduced in March. That has prompted unemployment to rise to 4.1% in the three months to July from 3.9% previously, pushing it to its highest level in over two years.

The pound gained ground against the euro in the wake of the data as fewer jobs were lost than expected, partly thanks to the UK’s furlough scheme propping up millions of people and businesses. However, there is little doubt that many of these jobs could be at risk once government support is pulled and the furlough scheme ends.

What is the furlough scheme and how successful has it been?

The Coronavirus Job Retention Scheme, as it is officially named, was introduced on March 20, 2020, to help people keep their jobs and support businesses with wages during the lockdown that forced most businesses to shut or scale back their operations.

Around 9.6 million people have been furloughed through the scheme in total by 1.2 million businesses. So far, the furlough scheme has cost the government over £35 billion and it is expected to cost around £60 billion in total, which is considerably less than the initial £80 billion budget. Still, it has been estimated that up to £3.5 billion has been lost in fraudulent or false claims.

Businesses of all shapes and sizes have furloughed workers during the pandemic but some sectors have been forced to rely on the scheme more than others, such as the hospitality, retail and arts and entertainment industries.

The UK government has been and is continuing to gradually taper off the furlough scheme, requiring employers to steadily contribute more towards their staff’s pay on a month-by-month basis.

• The Coronavirus Job Retention Scheme was introduced on 20 March. This provided employers with financial support to cover up to 80% of an employee’s salary, capped at £2,500 per month
• Employers had the choice to start bringing back employees on furlough from 1 July, including at reduced hours or with different shifts. The government continued to cover up to 80% of wages for any hours not worked
• Businesses had to start paying towards National Insurance and pension contributions for their staff from 1 August, but the government continued to pay up to 80% of wages for any hours not worked
• The government pulled all National Insurance and pension support from 1 September, and businesses were forced to contribute at least 10% towards the pay of furloughed staff with the government contributing 70% (for a total of 80%), at a lower cap of £2,187.50
• Businesses will be forced to pay 20% of furloughed staff wages from 1 October, while the government will cover up to 60%, capped at £1,875
• The furlough scheme is due to close on 31 October, when the bulk of government support will be withdrawn

As a result, fewer people have been furloughed as businesses have contributed more towards their wages. Companies had no problem furloughing staff when the government was covering the entire cost, but have been more wary when they have been required to fund some of the costs themselves. Plus, many workers have been able to return to work in some form since the national lockdown ended.

The ONS said the number of people furloughed at any one time peaked at just under 9 million on 8 May but said this fell to just under seven million by the end of June. The latest data suggests there was just three million people still furloughed in late August.

What will happen when the furlough scheme ends?

The point of furlough was to stabilise the economy through the pandemic by allowing businesses to retain their staff without the burden of paying them whilst their finances were under pressure during lockdown. The idea was that this would allow businesses to pick up where they left off once lockdown ended and the economy bounced back.

The problem is, while the furlough scheme is ending, we are far from returning to normal life. Business has improved for many since the national lockdown was eased but demand remains well below pre-pandemic levels for most, and the fact there could be a second wave on the horizon casts further doubt for many industries.

Quite simply, many businesses aren’t in a position to pick up where they left off and, without government support. They will have to take drastic action to shore up the balance sheet. For example, the airline industry has said international travel isn’t expected to recover until 2024, while other industries like hospitality will struggle to attract customers in a world with social distancing when their business models rely on tourism and people socialising.

This means there will undoubtedly be a substantial uptick in the number of job losses over the coming months if the government doesn’t extend or introduce new types of aid.

Businesses face a handful of options when the furlough scheme ends. They can choose to bring furloughed workers back full-time, bring them back with fewer contracted hours, or cut them loose and make them redundant.

We have already seen a steep decline in the average number of hours worked during the pandemic, and the number of redundancies is already rising ahead of the furlough scheme ending, with the ONS reporting 156,000 redundancies made in the quarter to July. That builds on the 108,000 made in the previous quarter and represents the highest quarterly increase since the 2008/2009 financial crisis.

How many jobs could be lost when the furlough scheme ends?

The outlook for the UK job market is therefore bleak, with a slew of surveys suggesting hundreds of thousands, and possibly millions of jobs could be at risk once government support is pulled.

A YouGov poll of over 500 business released in June showed more than half were planning to cut jobs within three months of the furlough scheme ending, with one in five looking to shed more than 30% of their workforce. Only one-third of them said they wouldn’t need to get rid of any staff. A survey by think tank Bright Blue followed in July, showing 44% of businesses using the furlough scheme intended to cut staff once it ended. It also highlighted that medium-sized business (with between 50 to 249 staff members) were most likely to make changes, with 65% planning on cutting jobs. A separate survey by the British Chambers of Commerce suggested nearly one-third of businesses would trim their workforce.

And, in September, the Institute for Employment Studies warned 450,000 jobs could be lost in the third quarter alone – considerably more than when redundancies peaked at 300,000 during the financial crisis. It expects a further 200,000 jobs to be lost in the final three months of the year. Taking other considerations into account, it warned the overall figure could be as high as 735,000 by the end of the year.

In a nutshell, unemployment looks set to surge once the furlough scheme ends, particularly in those sectors that will take much longer to recover. The ONS has already flagged that young people are being particularly hard-hit at the moment, with 563,000 of them becoming unemployed in the latest quarter.

It said the 16-24 age group was the only one to see an uptick in job losses compared to the previous year, whilst all others fell or stayed broadly flat. This reflects the fact that young people are in the early stages of their career, or tend to work in industries that have been hardest hit by the pandemic, such as hospitality and retail.

Will a new type of support be introduced by the UK government?

The UK government is adamant that the furlough scheme must come to a close at the end of October, claiming an extension to a blanket support programme would be unsustainable and impractical by keeping people in unviable jobs.

However, while the furlough scheme in operation today will almost certainly end, all signs suggest the government will introduce new, scaled-back and more targeted financial support – possibly as part of chancellor Rishi Sunak’s Autumn Budget.

The chancellor has said getting people back to work is his top priority and that he will be ‘creative’ with policy, while employment minister Mims Davies has said support could be extended to those sectors that will undoubtedly take longer to recover from the pandemic.

Interestingly, this fits the bill of the opposition Labour Party leader, Kier Starmer, who wants to encourage businesses to cut hours rather than jobs if it means keeping people in work. The average number of hours worked by full-time employees dropped to just 30.3 between April and June from 36.9 hours before the pandemic, and although it recovered slightly between May and July it remains well below pre-pandemic levels at just 30.8 hours.

Will the UK prove more frugal than its European counterparts?

The UK government will also be further encouraged to extend financial support to businesses by the fact that its European neighbours are. A study released by insurer Allianz in June suggested up to 45 million workers, representing up to one-third of Europe’s workforce, were being supported through various job retention schemes in the five largest economies, being Germany, the UK, France, Italy and Spain.

The majority of these European powerhouses have already announced lengthy extensions to their schemes in the knowledge that the economies will not recover until next year at the earliest. Germany already said its support scheme, named Kurzarbeit, would run until the end of March next year, but has now extended the scheme to the end of 2021. France’s temporary job retention scheme runs until early April next year but is expected to be extended until at least summer 2021 and possibly into 2022.

Even Italy, one of the hardest hit by the virus both in terms of casualties and finances, is extending its own scheme, albeit it at a gradual pace due to its financial woes, while Spain, already suffering severe high unemployment, is also likely to continue supporting businesses when its programme closes at the end of September.

This is why there are grave concerns over the UK’s intention to close the furlough scheme without outlining what support, if anything, will follow it. It could cause a spike in unemployment in the UK and weaken the economy whilst European countries continue to prop up workers and businesses to retain their ability to recover. The fact the UK is the only one to have closed its furlough scheme to new applicants – having made the cut-off at the end of June – suggests further that the scheme will almost certainly end, placing hopes that a new, more sustainable package of support will follow.

The UK has already been the worst-hit by the pandemic, according to data from the OECD, having seen gross domestic profit (GDP) slide by 20.4% in the second quarter (Q2) of 2020.

The Allianz report suggests that up to an extra 4.3 million people could become unemployed across the five countries and that up to nine million workers – or a fifth of all those on furlough – will be at higher risk of losing their jobs in 2021 because of the ‘the muted recovery in late bloomer sectors and the policy cliff effect’.

What’s worse is that the insurer also warned that the UK had one of the highest percentages of ‘zombie workers’ – those that will be ineffective and unproductive during the pandemic – among the group alongside Spain and Italy, thanks to the number of people working in labour-intensive industries like construction and retail.

Unemployment in the UK remains historically low and 4.1% is manageable, but we know this will rise. The question is by how much, and how it will compare with other major economies. Forecasts from the OECD suggest UK unemployment could more than double as a result of the pandemic, and even treble if there is a second wave of the virus. It suggests the UK would fare well compared to Europe so long as the virus doesn’t flare up again, but would be one of the worst-hit in terms of employment if there is a second wave.

What could this mean for GBP/EUR?

Low unemployment is necessary for an economy to thrive, and a rise can hit an economy hard. People curtail spending and struggle to pay their debts when they lose their jobs, businesses experience lower demand, the government has to pay out more in benefits, and so on.

If the UK ends the furlough scheme outright and fails to replace it with something that can stem job losses, there is a high chance that unemployment could rise at a much higher rate than its European counterparts that intend to continue to prop up the economy for much longer. This could significantly weaken the UK economy and place pressure on the pound.

The market will be eagerly monitoring data out of the UK and Europe over the coming months and judging whether the UK or Europe is best placed to stage the strongest recovery. Trading forex allows you to take a view on the economy and outlook of a country relative to others, and if the European recovery outperforms the UK’s then this will undoubtedly put pressure on GBP/EUR, or strengthen it vice versa.

Read more: How to trade forex

Right now, it is hard to see how sterling could gain material ground on the euro based on the current situation. The UK economy has taken a bigger battering during the pandemic than Europe. Most of the European powerhouses have agreed to extend support schemes while the UK is ending all support and biding its time before it unveils its next step.

UK unemployment is set to rise considerably more than the wider euro area, especially if there is a second wave. Plus, the potential disruption of Brexit will once again have a growing influence on GBP/EUR as we draw nearer to the end of 2020, and both sides remain far from reaching an amicable agreement on their divorce or future trade relations.

The government’s plan to support business beyond the furlough scheme will be key in deciding the fate of sterling over the coming months. It is highly likely that some sort of aid will be offered to the hardest-hit sectors but the market will have to judge whether it will be enough to stop unemployment from soaring at a time when it is likely to remain relatively subdued in Europe until next year at the earliest.

Read more: How has the value of the pound changed since Brexit?

EUR/GBP: technical analysis

EUR/GBP has started to regain ground following a decline into trendline and 50% retracement levels. With the pair having seen sharp gains throughout the beginning of the month, there is a good chance this recent pullback is a retracement before we turn higher once more.

With that in mind, the bulls were always likely to come back into play before long. Whether that rebound begins here remains to be seen, but we are certainly beginning to assume a more bullish position today.

On the hourly chart, the recent failure to break below the £0.9068 level signals the potential for a rebound from there levels. The sharp rise seen this afternoon does not necessarily break us out of this short-term selloff.

A break above £0.9207 would do that. Nevertheless, with the pair turning sharply higher rather than breaking below the £0.9068 level, there is a good chance the recovery could be beginning to take place.