John Ashcroft is Founder, CEO and Author of The Saturday Economist. In a Q&A ahead of his keynote in The AHC Reimagined, he shares his thoughts on economic recovery, governmental policy and the travel and real estate markets in the UK.
As an economist, how is it possible to assess the market and make predictions in this unprecedented landscape?
It is always easy to assess the market and make predictions, the problem is ensuring the predictions have any degree of accuracy. Most forecasters expect economic growth to fall by around just over 9% this year. The shock to output in the second quarter was just over 20%. Analysts assume a progressive return to growth, as lockdown eases and the return to work continues.
Our base case scenario is a 10% drop year on year in Q3 and a 5% drop in the final quarter. As we move into the New Year, the year on year comparisons will begin to look pretty good.
We analyse GDP(O) or output into twenty different sectors. Each weighted by their contribution to overall output growth. Manufacturing fell by 20% in the second quarter, construction output fell by 35%. The hotel and restaurant sectors were badly hit. The drop in output was 90% in Q2, as most outlets were closed for business.
It’s not all bad news. Headlines suggest consumers are spending again. The housing market is experiencing a strong recovery. The “Eat Out to Help Out” has confirmed families can be lured back into cafes and restaurants. DFS have reported strong furniture sales. An increase in staycations has led to jobs growth at Haven holiday parks.
So what shape will the recovery be? It’s a V, it’s always a V. Economists model the “reversion to the mean”, things return to a semblance of normality, eventually. The problem is, for certain sectors, it may take just a little bit longer than others.
What do you see as the major indicators of the UK’s economic health (or lack of) in the current circumstances?
We watch closely the monthly GDP output figures, with a clear focus on recovery in the key sectors. Consumer spending is under scrutiny, the pattern of retail spending particularly important. For the moment, the numbers appear to be moving in the right direction.
The labour market is the “one to watch”. The headline unemployment numbers suggest little increase in job losses for the moment. The number of vacancies in the economy has halved, the claimant count has doubled. Major fears are for the unemployment numbers to increase as the furlough scheme unwinds. Over 9 million were reliant on government support during the crisis. The scheme is due to unwind at the end of October. The number of unemployed will increase to between 2.5 and 3.0 million, with job losses high particularly in those sectors slow to recover, if the scheme is not extended.
What measures from the Government are having the biggest impact on promoting economic recovery? What more is needed?
Monetary and fiscal conditions are incredibly relaxed. The Bank of England has set the tone with a reduction of base rate effectively to zero. The Bank has also committed to stand by as the “Buyer of Last Resort”. The Treasury will issue some £300 billion of gilts this year. The pretence of QE rhetoric cast aside. The Old Lady of Threadneedle is ready to dip into the handbag and pull out that enormous purse, to absorb the burden of the DMO Debt Management Office.
The Treasury has played a great part in avoiding a total collapse during shutdown. The furlough scheme, payroll schemes, loan schemes, cash schemes, VAT reduction, payment concessions from HMRC all have played a part. The Chancellor Rishi Sunak committed to “Give all the tools needed for businesses to get through this”.
So what more is needed? We would like to see an extension of the scheme up to Easter next year. The number of unemployed will increase to between 2.5 and 3.0 million, with job losses particularly high in those sectors, slow to recover, if the scheme is not extended.
Interesting to note, Germany has extended its own furlough scheme until the end of 2021. It may be time for yet another government “volte face”, this time on the decision to furlough the furlough scheme.
How is the travel market performing, and where is it headed?
Leisure and tourism is one of the worst hit sectors during the crisis. Most airlines do not expect a full recovery in international travel for several years yet. The latest data on UK travel suggest passenger numbers both in and out of the country fell by 50% in March. During the shut down the numbers will have fallen by 90%.
The World Travel and Tourism Council warned this week, spending by tourists could drop by 80% this year at a cost of £22 billion to the economy. “London’s status as a centre for travel be it pleasure or business, could be damaged for years to come”. Transatlantic air travel between the UK and USA is just 20% of the same level a year ago.
Charlie Cornish CEO of Manchester Airport Group suggested passenger volumes were down by 75% in August, a period which should be one of the busiest in the year. MAG is closing, once again, Terminal 2 to reflect the drop in activity.
Despite some recovery in the hotel and restaurant sectors, we expect the overall level of activity to be down by 30% in the final quarter of the year. A full recovery in the hotel sector specifically may not be possible before the end of 2021.
The government is coming under intensive criticism for the handling of the crisis. Gloria Guevara, president and chief executive of the World Travel and Tourism Council said “Ministers need to replace stop-start quarantine measures with rapid comprehensive test, track and trace programmes at departure points across the country.
Charlie Cornish called for an end to the Government’s “sluggish, illogical and chaotic approach to quarantine.” Having initially imposed blanket quarantine rules on all destinations, travel “corridors” were then agreed with the most important tourism markets. Corridors were closed as outbreaks increased in the Northern regions of Spain. The Canary islands were caught up in the shutdown. Over half of the most popular destinations are effectively closed to tourists for the UK.
The “whack a mole” strategy has all the underlying sophistication of “pin the tale on the donkey”. Blindfold participants making random decisions with no overall vision or objective.
What is the strategy? It should be to return the tourist trade and travel market to some semblance of normality at the earliest opportunity.
A see through strategy is required. Why set the infection hurdle rate at 20 per 100,000 if this means countries jump on and off the travel black list at short notice.
Time to accept the quarantine rules on return are “phoney nonsense” enforced by haphazard and inadequate checks, as Jenni Russell, in the Times suggested this week.
Why include the Canary islands in a Spanish shut down when Catalonia is closer to Cheshire than it is to Gran Canaria.
“Come on in, the waters lovely and the R(0) is less than one” appears to be the guideline. But who would have thought we could measure regional infection rates to two decimal places to determine the travel strategy for millions.
So how is the travel market performing. The sector has been badly hit. The recovery will be lengthy and protracted unless a clear strategy for recovery is established with additional support from HM Treasury.
How about the real estate market?
We segment the real estate market into retail, commercial and industrial.
The Retail Market …
The retail market has been damaged by the move online, accelerated during the period of shutdown. Retail footprints are shrinking. 40% of non food sales are now online. John Lewis expects internet sales to account for 60% to 70% on total sales this year, compared to 40% last year. Online food sales have increased to over 10% of total sales compared to just 4% last year. The expectation is for online sales to double again within three years.
The high street and retail parks are already feeling the pinch as the online push continues. The move from Mall to Mausoleum is the threat to the big players in retail as the Intu experience suggests.
The Commercial Market …
The commercial market appears to be under threat as the work from home or flexible working revolution is set continue. Will the tumbleweed blow across Canary Wharf? Jes Staley, Group Chief Exec of Barclays has suggested the big office block, like the Bank’s 7,000 seater in London, could become a thing of the past.
PwC has said the majority of its 22,000 employees can work from home after the pandemic. JP Morgan, Schroders and Linklaters have both called an end to the daily commute.
Amongst the social media giants, Twitter has told employees they can work from home indefinitely. Facebook is shifting to a substantially remote workforce. Amazon, on the other hand is placing a bet on office based work. The plan is to add 3,500 employees in six cities, over 2,000 of which will be based in New York.
57% of Londoners do not want to go back to normal commuting. Yet PwC has reported staff are returning to the office. “Around 1000 staff are returning to work every week, seeking refuge from working in shared flats.”
Many still seek that “in person” experience. Onboarding and in house training cannot be achieved in a work from environment, flexible working will be the norm. The number of days in office will be reduced. But don’t write off the commercial sector just yet. The underlying demand for space is set to continue as growth returns to the economy.
The Industrial Market …
Developments in the industrial market are dominated by trends in the logistics sector. Warehousing and distribution is probably the fastest growing area in the commercial property market.
Tesco is set to add 16,000 jobs as the move online continues. Amazon is trialling Morrisons food in Leeds this year. Ocado is linking with M&S. Waitrose expects online sales to hit 20% of all transactions within two years. New “fulfilment” centres are planned in Peterborough, London and the North.
Amazon has set the standard for user experience and user journey. One click commissions the fast track UX and UJ. Analysts now talk of the “parcel experience” and parcel journal, the last mile a particular challenge. The idea of delivery drones in the skies over cities is now no longer such a fantasy project.
The latest RICS survey suggested the industrial (logistics) sector recorded the highest ever number of commercial property transactions in the first half of 2020. The trend is expected to continue.
What is the main message you would like to share with the AHC audience?
The shock to output in the economy has never been so severe. The drop of over 20% in Q2 is unprecedented. The decision to lockdown the economy may well have been correct. We always warned, imposing mediaeval measures of containment to a contemporary economy, would risk driving us all back to the dark ages.
The recovery in the economy could be much swifter than is currently anticipated. Both monetary and fiscal policy are set to accommodate a rapid recovery. The government will spend some £300 billion in the current financial year to facilitate the process. As businesses are allowed to return to work, output growth will accelerate. The reversion to the mean, the return to normality will follow.
Some sectors will be slower to recover than others. Travel and tourism, hotels and leisure may well be at the back of the queue. More government help is needed financially via the furlough scheme and logistically with a clear, transparent, logical, strategy for the sector.
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John Ashcroft will give a keynote presentation on 'Cycle, Interrupted: The Economic Outlook' at The AHC Reimagined on Thursday 8th October. To hear more from John and other expert speakers about the opportunities in the UK hotel market, register here.