Coronavirus: Economic Impact Scenarios for Somerset (Summary) - PowerPoint Presentation

1. Coronavirus: Economic Impact Scenarios for Somerset (Summary)A Report For South West CouncilsOxford Economics, July 2020

2. Scenario ForecastsThe following slides summarise material published by Oxford Economics on behalf of South West Councils.To read the report in full, please consult the Somerset Trends COVID-19 Impacts page.The report sketches out three economic scenarios, which are also referenced in these slides. These scenarios consist of:Baseline Scenario: Assumes a smooth transition from the UK’s first lockdown, with a sharp recovery in 2021. Government support is assumed to remain in place, in addition to low inflation and loose monetary policy.Downside Scenario: Assumes an extension of lockdown into Q3 2020, a limiting of overall credit supply, and longer-term reductions in spending by the UK government to reduce debt.Upside Scenario: Assumes the discovery of a vaccine towards the end of 2020, in addition to increased testing capacity, leading to a boost in consumption. This scenario therefore assumes a quicker recovery into 2021.Additional assumptions: A few assumptions apply across these scenarios. Firstly, it is assumed the UK would have negotiated some kind of free trade agreement and/or an extension to current arrangements to the end of 2022. In addition, the modelling assumes a long-term decline in manufacturing jobs, as the UK’s departure from the EU adds a regulatory burden to exports, in addition to the manufacturing process becoming more automated.

3. Somerset GVA Projections:GVA is forecast to shrink by 8% in 2020 due to a steep fall in activity in Q2, followed by a 7.4% rise in GVA in 2021. Somerset’s GVA by 2025 1.8% lower than in Jan 2020 pre-pandemic forecast.Downside forecast (premised on a second wave of (C-19) sees GVA contract by 13% in 2020, returning to 2019 levels in 2027.Upside forecast sees a GVA contraction of 7.8% in 2020, with GVA rebounding in 2021 with growth of 10.3%.National & Regional GVA ProjectionsIn the baseline scenario, UK GDP contracts by 8% in 2020, before recovering by just over 7% in 2021. A downside projection assuming extension of lockdown through Q3, sees GDP contract by 13% in 2020. SW GDP is forecast to shrink in line with the national average of 8% in 2020, with 7% GVA recovery in 2021. A downside scenario forecasts GVA contraction of 13%, with recovery prolonged until 2027. Headline GVA ProjectionsSomerset GVA, Distribution of Alternative Scenarios UK GDP, Distribution of Alternative Scenarios

4. Somerset Employment & Unemployment ProjectionsIn the baseline scenario, the ILO unemployment rate is forecast to spike, reaching 5% in 2020, with 10,000 jobs lost. The ILO drops significantly however in the proceeding years, reaching 3.1% by 2022.In the downside scenario, unemployment reaches a peak of 7.9% in 2021, remaining above 4% till 2027. Positive employment growth would not return till 2022 under this scenario. In an upside scenario, employment would fall by 3.6% in 2020, followed by a 3.2% rebound in 2021.National & Regional Employment & Unemployment ProjectionsNational unemployment peaks at 6.5% in 2020, before recovering in 2021, with pre COVID levels of employment reached by 2022 and unemployment returning to 2019 levels by 2023. In the downside scenario, unemployment peaks in 2021 at 9%, remaining at 5% up to 2029, highlighting the potential long-term scarring effects of a deep recession. At the regional level, unemployment spikes at 4.5% in 2020 due to an estimated projected fall of 112,900 jobs, with this level slightly below the county and national averages, before largely recovering by 2022. In the downside scenario, 140,000 job losses are projected to occur in 2020, 27,100 more than the baseline scenario. Further job losses in 2021 would push unemployment to 7.4%. Somerset Unemployment Baseline ForecastUK GDP & Jobs, Baseline Forecast

5. Sector Analysis OverviewSomerset’s sectoral composition constitutes a key variable in both GVA & Employment rate projections.Somerset is over-represented in the hospitality & leisure sector compared with the national average, with accommodation & food and arts, in addition to entertainment & recreation, making up around 11.9% of total employment in 2019. These sectors have been heavily impacted by lockdown restrictions, and have therefore lost a significant amount of output already in 2020.Manufacturing is another key industry for Somerset, accounting for 11% of jobs. This industry is forecast to be one of the hardest hit sectors in 2020.Somerset is under-represented in industries where WFH capability has insulated continuity of working, such as in professional services, information & communications, and finance & insurance.Importantly, Somerset is well represented in the human health & social work industry, accounting for 15% of employment in 2019, with this industry anticipated to remain relatively resilient throughout 2020 due to increased government spending in the industry to build resilience against C-19.

6. Baseline Scenario Sector Challenges:Sectors facing the largest challenges in 2020, and therefore the potential biggest job losses, are those that have been hit hardest by lockdown and social distancing restrictions.Hospitality & Leisure for example is set to lose 5000 jobs in 2020, whilst the retail sector is forecast to shed 2400 jobs as a consequence of reduced consumer spending. In manufacturing, 2100 jobs are forecast to be lost in 2020. Importantly however, sub-sectors of manufacturing, such as in food production, are likely to remain resilient due to continuity of demand and less relative integration with global supply chains. Employment in other sectors is expected to remain relatively flat, although construction is a notable exception, forecast to lose 1000 jobs in 2020 due to on-site restrictions & supply chain disruption. An important caveat to bear in mind regarding the above analysis is the exclusion of major infrastructure projects such as Hinkley Point C, with the peak workforce figure estimated at circa 5000.Baseline Scenario Occupation ForecastsThe impact of C-19 is diversified across occupations. Relating to inclusive growth considerations, lesser-skilled occupations are likely to be disproportionately affected, with sales & customer services, process, plant & machine operatives, and elementary occupations accounting for 46% of all job losses in 2020, despite accounting for only 28% of all employment in Somerset.These occupations are largely forecast to be affected due to contractions in manufacturing employment, with sales & customer service drops reflecting hospitality employment losses. The job recovery through to 2025 is largely premised on growth in higher-skilled occupations, with more than two-thirds of additional employment in the managerial, professional or associate occupations, reflecting growth in business services and human health & social work.The increase in caring, leisure & other services (2200 workers) primarily reflects growth in the human health & social work industry.Somerset Occupations 2019-25, Baseline Scenario Somerset GVA & Jobs growth, 2020-5, Baseline Scenario

7. Industry Analysis Downside Scenario:Industries facing the largest challenges in 2020, and therefore the potential biggest job losses long-term, are those that have been hit hardest by lockdown and social distancing restrictions. The downside scenario, premised on further lockdown restrictions, exacerbates this trend.In Manufacturing, an estimated 4000 jobs are forecast to be lost by 2025, equivalent to a decline of 12.6%. In addition, GVA in manufacturing does not recover its 2019 levels within the OE’s long-term forecast, with GVA declining by 10.2% from 2019-2025.In retail, total jobs decline by 1200 from 2019-2025 from 41,500 in 2019, with the total number of jobs remaining relatively stable at this reduced level in the long-term.By contrast. accommodation & food total jobs grow by 900 from 2019-2025, equivalent to growth of 3.7%. In arts, entertainment and recreation, total jobs are forecast to increase by 700 from 2019 to 2925, although GVA output doesn’t return to pre-pandemic levels until 2028. By contrast, the human health & social work industry sees total jobs increase from 41,800 in 2019 to 45,300 by 2025 (3500 increase), an increase of 8.3%. Similarly, professional, scientific and technical activities are forecast to see growth of 400 jobs, reaching a total of 20,000 jobs up to 2025, although job growth is fairly low at 2%.Education is forecast to see an additional 500 jobs from 2019-2025 reaching a total of 24,100, with growth of around 2.1%.Somerset Jobs Growth, 2020-5, multiple scenarios

8. District AnalysisMendip & Sedgemoor’s GVA is expected to contract by 8.6% in 2020, primarily due to the districts respective business compositions having strong proportions of accommodation & food, in addition to manufacturing businesses, and under-exposure to resilient sectors such as professional services and human health & social work. It should be noted however that this modelling has not factored in Sedgemoor’s strong composition of food manufacturing businesses, which has put downward pressure on overall GVA projections.By contrast, SWT is forecast to witness the smallest contraction of GVA in 2020 (-7.2%) due to a large & resilient human health & social work industry, in addition to less exposure to the manufacturing industry.Over the 2020-5 period, South Somerset is forecast to see flat employment growth figures, primarily due to the modelling’ s emphasis on manufacturing being highly exposed to short-term C-19 impacts, in addition to Brexit trade alterations and increased use of automation leading to less labour intensive methods of production.Growth over the 2020-5 period is forecast to be led by SWT, with human health & social work primarily responsible for this trend, in addition to broader positive growth across service sectors more generally.GVA & Jobs Contraction by district 2019-2020, Baseline Scenario GVA & Jobs Growth by District, 2020 to 2025, Baseline Scenario

9. District Analysis – Downside ScenarioWhilst data is more limited at the district level, the downside scenario forecasts South Somerset to lose 1600 jobs by 2025, primarily due to a steep forecasted decline in manufacturing, in addition to a decline in wholesale & retail industries.Mendip is anticipated to see negative job growth by 2025, albeit only by 100 jobs, whilst Sedgemoor is anticipated to see small job growth by 2025 in the region of 100 additional jobs.Somerset West & Taunton is somewhat of an outlier in this scenario, with projected growth of 1600 jobs by 2025. This is primarily due to the assumption of strong growth in the human health & social care industry, which is anticipated to shield SWT from steep job losses.

10. Vulnerability IndexOn a separate metric, OE has constructed a C-19 ‘vulnerability index’ summarising vulnerability across three themes: economic diversity/industrial structure, business structure, digital connectivity. All four of Somerset’s districts are potentially more vulnerable to impacts of C-19 than the national average. Sectoral profile is an important component of this vulnerability, and is comprised by the ‘economic diversity’ score.In regard to business structure, Somerset’s preponderance of micro businesses and SME’s, many of which have lower cash reserves and restricted access to credit are considered vulnerable.In addition, self-employment, which accounts for 19% of employment in Somerset, higher than both regional (16%) and national (13%) averages, is considered to be less job secure, in addition to having less avenues of financial support.The ability to WFH, an important variable in the ability to continue work despite lockdown, is captured by the digital connectivity theme, with poor broadband connectivity in rural areas making Somerset vulnerable.DistrictsSedgemoor is considered the most vulnerable, being classed as one of the least diverse local economies in the UK due to a reliance on hospitality and manufacturing industries.Small towns, which primarily rely on four key sectors of accommodation, arts & leisure, non-food retail and pubs & restaurants mean a disproportionate exposure to lockdown restrictions. Connected to the above is a decrease in consumer spending in towns. In Bridgwater & Taunton, consumer spending has fallen by 50% and 45% respectively. Towns such as Minehead (-24%) and Street & Wells (-28%) have performed comparatively well, despite these large contractions. Yeovil has seen consumer spending increase, only 1 of 3 towns in England & Wales to see this effect over lockdown.

11. People:At the headline level, the net effect of the C-19 pandemic is forecast to precipitate a 5% reduction in disposable income for Somerset’s residents.Whilst little hard data is yet available to distinguish specific economic impacts on different groups, research has demonstrated that those groups who have been able to WFH throughout lockdown have seen an increase in savings due to less consumption.By contrast, those who have been furloughed, moved on to UC, or in a small instances of cases made redundant outright, will have seen a significant fall in overall income,Men have so far been more likely to lose their job than women during the current crisis, with men more likely to be working in sectors where the largest job cuts are expected, such as in construction & manufacturing. Men are also more likely to be self-employed, a group that has been offered comparatively less access to support. The sector profile of likely job losses also suggests young people could be more vulnerable than other groups, being disproportionately more likely to be employed in hard-hit sectors such as accommodation & food, and arts entertainment & recreation. Younger households are also less likely to have a significant cash buffer to cover loss of income, in addition to having less capacity to cut back on spending due to fixed costs such as renting.A further group at risk, are those often referred to as ‘just about managing’, generally referring to low to middle income families who have little disposable income and low savings. Figures for 2017 show that 31% of children in Somerset are in working families claiming tax credit, highlighting the importance of the longevity and effectiveness of government interventions for this group.Whilst older age groups may be less directly economically exposed to a loss of income, those who rely primarily on private pensions for income may see more volatility due to global stock market movement, in addition to annuities hitting record lows. With 25% of Somerset’s population aged over 65, it is also important to remember that in pure health considerations, this group has been heavily affected.

12. The ‘new normal’Whilst the short-term effects of C-19 are likely to be severe in intensity, the structure of Somerset’s economy (what it looks like) is likely to remain largely unaltered, with projected industrial composition in 2025 comparable to that of 2019. How  Somerset’s economy operates however may see profound change. The continuation of social-distancing requirements is likely to limit the capacity of public spaces, including retail & leisure hubs, in addition to public transport, potentially leading to lower sales and an increase in the upward trend of online spending, putting further pressure on the high-street. Prior to the pandemic, OE estimates that 9% of people in Somerset worked regularly from home. A more permanent shift towards increased WFH capacity in business services, along with other information led industries, could lead to a review of the amount of office space required for major employers. This would have knock-on effects for those businesses reliant on supporting commuters and office workers, particularly in town centres. Another impact concerns the potential for firms reliant on extended supply chains to review their operating models, pivoting towards more resilient local supply chains to ensure continuity of supply. Similarly to the above point, the production sector may review its usage of industrial space, particularly if firms choose to operate with larger inventories to ensure stock security in event of a disruption.

13. Modelling Assumptions & Health WarningsAn important caveat to highlight in any modelling work is the number of external factors that can impinge upon the reliability of any forecast. There remains a great deal of uncertainty regarding the data due to numerous variables, including the scale of the impact of the virus, the measures introduced to ameliorate these impacts, the longevity of these support mechanisms, the event of a second wave of C-19, and so on. These confounding variables are fundamentally unknowable, and therefore the data should be interpreted with a high degree of scrutiny and caution. With these health warnings in mind, it is important to bear in mind some key points when interpreting Somerset and regional level projections.Firstly, UK forecasts in the aggregate are highly influenced by the Greater London region, which accounts for around 25% of the UK’s economy and is expected to continue to grow at a fast rate. Indeed, the baseline outlook for the South West is broadly comparable to the national average if London is excluded. Secondly, high-level modelling work such as this report does not have the capacity to dig deeper than headline industry classifications, or ‘standard industrial classifications’ (SIC). Therefore, whilst ‘manufacturing’ in the aggregate is forecast to perform poorly from 2020-5, this modelling does not take into account specific sub-sectors of manufacturing, such as food production, which are likely to remain resilient due to strong domestic consumption patterns and low-reliance on global supply chains.Additionally, as mentioned on previous slides, this modelling does not take into account major infrastructure projects such as Hinkley Point C and the Gravity Business Park, both of which are likely to generate major job creation which is not included within this analysis. Finally, a significant variable impacting on the performance of a sector like manufacturing is that of Britain’s future trading relationship with the EU. The baseline scenario predicts a free trade agreement of some form by 2021,but calculates this will likely involve additional bureaucratic and regulatory layers which will harm manufacturing output’s profitability. At this time with so much uncertainty as a result of the pandemic, it is difficult to predict the future trading terms between the UK-EU, with a ‘better’ FTA potentially boosting manufacturing’s prospects in the long-term.