Redundancies increased to a record of 314,000, up from 181,000 from the previous quarter. The ONS reported that the number of workers laid off by firms in the first two weeks of September was exceptionally high; a period which coincided with employers having to pay more towards the cost of furloughed staff.
What does it mean for our forecast?
The latest data was in line with our expectation of a gradual increase in the official unemployment rate. The headline rate of 4.8% is now the highest since September 2016 and is likely to continue to rise over the coming months as the economic growth once again turns negative.
The new national lockdown, lockdown 2.0, has forced the closure of large parts of the economy, including the accommodation and food service sector along with the recreation and leisure sector. Combined, these sectors of the economy employ millions of workers and were already under significant pressure following the first lockdown in March. If lockdown 2.0 was not accompanied by the extension of the furlough scheme, our unemployment forecast would have been significantly higher then what we were expecting only a month ago, reaching nearly double figures.
However, the extension of furlough scheme announced by the Government on 31 October has both brought down and pushed out the peak of unemployment in our forecasts. The terms of the extension to the scheme are more generous then what was available to employers in both September and October, and in line with the original terms of the scheme announced in March. This means that more employers are likely to access the scheme protecting jobs and mitigating the rise in unemployment. We expect the unemployment rate to reach just above 7% in the second half of next year on the official definition; with it rising to above 8% on our own definition.
How are we helping lenders?
We are helping lenders in several ways when it comes to unemployment. Two key examples are centred around accurately reflecting the unemployment risk for credit market and tailored unemployment curves.
Past historical relationships between unemployment and credit delinquencies have been strong. In the previous financial crisis, unemployment rose to over 8%, and delinquencies doubled over a three-year period. This time, however, the economic impact is yet to feed through fully into both unemployment and delinquencies.
We are helping our clients to capture the ‘true’ unemployment by looking at unemployment data beyond the headline rate. For example, by analysing average hours worked and payrolls data, we estimate that an additional 33,000 were unemployed this quarter. There is also a growing number of people declaring themselves inactive, i.e. not actively looking for work. The official definition does not capture these people. Our view is that these individuals should be considered unemployed by credit lenders, as they are likely to have been credit active very recently and the loss of employment is likely to signal a significant increase in credit risk. When this population is also taken into account, we estimate that the ‘true’ unemployment rate sits closer to 6.5%. We strongly believe that lenders should take the true unemployment rate into consideration when calculating their future loss provisions.
We have developed another layer of unemployment estimates beyond the headline rate. The unemployment rate faced by lenders is not going to be the same; it will differ lender by lender, and portfolio by portfolio. We have used our sector, regional and demographic level to create tailored unemployment curves. These curves capture the risk a lender faces by making analysing the location and age of customers. By combining both the true unemployment rate and the tailored unemployment rate, lenders can regain confidence in the relationship between unemployment and delinquencies.
Watch the below video where Mohammed Chaudhri, Experian Chief Economist, explains how tailored unemployment curves work.