Japan’s middle class is ‘disappearing’ as poverty rises, warns economist | CORPUSVEC SOVEREIGN TALENTS

KEY POINTS

• As poverty rises in Japan, the country’s middle class is slowly eroding away, according to a recent report by Oxford Economics’ Shigeto Nagai.
• A “major driving force” determining the income distribution has been its “life-time employment system,” he said.
• The growth of part-time employment and lackluster inflation expectations have also contributed to the trend.
• Still, Nagai said Japan’s labor market is going through “lots of changes,” with start-ups and overseas companies offering higher pay for young talent.

A man wearing a facemask walks past a taxi along a street in Shinjuku district of Tokyo on June 24, 2020.

As poverty rises in Japan, the country’s middle class is slowly eroding away, according to a recent report by Oxford Economics’ Shigeto Nagai.

“After the bubble burst in the 1990s, income has declined across the income percentiles, and the share of low-income households has risen as those of middle- and high-income groups shrink,” Nagai, who is head of Japan economics at the firm, wrote in the report.

The ten years starting from the early 1990s have often been referred to as Japan’s “Lost Decade.” The period was marked by economic stagnation and deflation following a boom in the prior years.

“Although it’s true that inequality hasn’t widened and income isn’t concentrated in the top tiers, the share of low-income households has been rising at the expense of middle-income groups in a process of secular income decline across percentiles,” the economist said.

Japan’s poverty rate stands at 15.7%, according to the latest figures from the Organization for Economic Co-operation and Development. That metric refers to people whose household income is less than half of the median of the entire population.

“The middle class is disappearing in Japan, albeit gradually,” Nagai warned.

Japan’s ‘life-time employment system’

A “major driving force” determining the income distribution has been its “life-time employment system,” Nagai told CNBC. It has been around for decades and was established during the country’s high growth period in the 1950s and 60s, he said, when there was a “very serious shortage of labor.”

The system is mainly practiced by relatively established companies and has three pillars, according to the economist:

1. The “implicit guarantee” to take care of employees until retirement
2. Wages that are dictated by seniority
3. Company-based labor unions

In this relatively stable but rigid employment system, wages rise only gradually. Companies also place heavier emphasis on job security rather than compensating for short-term improvement in company performance or productivity, Nagai said.After the bubble burst in the 1990s, income has declined across the income percentiles, and the share of low-income households has risen as those of middle- and high-income groups shrink.HEAD OF JAPAN ECONOMICS, OXFORD ECONOMICS

The economist told CNBC that wage increments are decided by an annual spring negotiation known as Shunto, where the wages of unionized workers are decided by labor unions and management. What distinguishes this process from elsewhere is that the base-pay increase usually spreads across the entire seniority-based wage scale.

As a result, Nagai said, the system does not create a “top 1% earner” unlike Western compensation systems where top executives typically earn much more than other employees. In fact, the economist said that executive pay is “negligible” compared with places such as the U.S. He said, however, the elite in Japan have been “satisfied” with this flatter salary scale.

Rising part-time employment

For years, Japanese companies have also been converting regular workers — who could previously enjoy the comparatively privileged lifetime-employment system — to part-time workers.

This shift, according to Nagai, started in the early 2000s as companies attempted to “survive” the competition with rising emerging-market economies such as China, where labor costs are lower.

More recently, the increase in part-time workers may also be coming from greater labor-market participation among two demographics, Nagai suggested: women who need work, but may not be able to commit full-time due to childcare duties and seniors who are no longer able to enjoy retirement as their pension benefits are not large enough.

According to data from Japan’s statistics bureau, the number of non-regular employees rose 2.1% annually in 2019. That was far faster than 0.5% growth in regular employees.

“Although hourly wages have been rising faster for non-regular workers amid a shortage of
labour, they’re still paid much less compared to regular workers,” Nagai said. “In addition, the entry of women and the elderly into the labour market as part-timers has depressed hours per worker for several years.”

“The share of low-income households will keep rising as more part-timers work fewer hours,” he said.

Low inflation expectations

Meanwhile, lower inflation expectations have “really stabilized” in the country, Nagai said, arguing this has also contributed to the stagnation of wage increases. For years, the Bank of Japan has struggled to meet its ever-elusive 2% inflation target despite taking drastic measures such as bringing interest rates into negative territory.

The main beneficiaries of low interest-rate policies and aggressive quantitative easing are usually those who own real estate or stocks, Nagai said. The impact has been “relatively limited” due to the risk-averse nature of Japanese households, which generally do not invest in stocks and corporate bonds.

He said this could be another reason why monetary policy has had limited impact on income distribution.

Sluggish consumption

The economist said he was concerned that the disappearance of Japan’s middle class could lead to further stagnation in consumption.

Consumer spending slumped after a sales tax hike in October. It fell even further this year as lockdown measures intended to contain the coronavirus pandemic froze economies. Recent data from Japan’s Ministry of Economy, Trade and Industry showed May retail sales dropped 12.3% from last year.

Nagai said the “jury is still out” over the government’s consumption tax hike due to the unexpected impact of Covid-19. While the move had “certain justifications,” the economist acknowledged lower income groups are more sensitive to tax hikes.

The way out

A more dynamic human resource allocation could help lead Japan out of this situation, Nagai said.

The lifetime employment system has led to many people being underemployed, he said. At the same time, numerous young people are left “reluctantly” living with relatively low pay, despite higher contribution and productivity.

The “static” allocation of human resources has hampered efforts to get rid of the “deflationary equilibrium” in Japan, he said. While more graduates are now choosing start-ups instead of established companies, Nagai said it is still “not a major trend yet.”

Prime Minister Shinzo Abe’s government has tried to combat many of these issues, attempting to make the labor market more performance-based, Nagai said. But corporations and their management have been reluctant to change, impeding government efforts, he said.

“Reform of the established employment system will be a protracted process because it has for decades served as an integral part of the economy and society,” Nagai said. “Transforming the system will require concurrent reform of social insurance and tax systems.”

Under the Abe administration, the Ministry of Economy, Trade and Industry has also worked to promote “economic metabolism” whereby losers exit and upstarts can bring “new energy,” the economist said.

While authorities have made a good effort, he said it is difficult for change to happen in such a short period of time.

For example, Nagai said Japan lacks Chapter 11-like bankruptcy procedures to give those who fail “another try.” He cited this as another example of limited flexibility in the Japanese economy, leaving people “very afraid” to make changes.

Still, Nagai pointed out that “lots of changes” are already underway in Japan, as the labor shortage has pushed companies to raise salaries to attract younger people. At the same time, there have been more start-ups and Chinese companies which “pay a lot” for young talent.

The number of people quitting their jobs early in their career to seek opportunities elsewhere is also “becoming more than negligible,” he said.

Such moves, in his opinion, would free up the labor market to enable more dynamic resource allocation while also contributing to wage inflation.

Japan’s middle class is ‘disappearing’ as poverty rises, warns economist | CORPUSVEC SOVEREIGN TALENTS

KEY POINTS

• As poverty rises in Japan, the country’s middle class is slowly eroding away, according to a recent report by Oxford Economics’ Shigeto Nagai.
• A “major driving force” determining the income distribution has been its “life-time employment system,” he said.
• The growth of part-time employment and lackluster inflation expectations have also contributed to the trend.
• Still, Nagai said Japan’s labor market is going through “lots of changes,” with start-ups and overseas companies offering higher pay for young talent.

A man wearing a facemask walks past a taxi along a street in Shinjuku district of Tokyo on June 24, 2020.

As poverty rises in Japan, the country’s middle class is slowly eroding away, according to a recent report by Oxford Economics’ Shigeto Nagai.

“After the bubble burst in the 1990s, income has declined across the income percentiles, and the share of low-income households has risen as those of middle- and high-income groups shrink,” Nagai, who is head of Japan economics at the firm, wrote in the report.

The ten years starting from the early 1990s have often been referred to as Japan’s “Lost Decade.” The period was marked by economic stagnation and deflation following a boom in the prior years.

“Although it’s true that inequality hasn’t widened and income isn’t concentrated in the top tiers, the share of low-income households has been rising at the expense of middle-income groups in a process of secular income decline across percentiles,” the economist said.

Japan’s poverty rate stands at 15.7%, according to the latest figures from the Organization for Economic Co-operation and Development. That metric refers to people whose household income is less than half of the median of the entire population.

“The middle class is disappearing in Japan, albeit gradually,” Nagai warned.

Japan’s ‘life-time employment system’

A “major driving force” determining the income distribution has been its “life-time employment system,” Nagai told CNBC. It has been around for decades and was established during the country’s high growth period in the 1950s and 60s, he said, when there was a “very serious shortage of labor.”

The system is mainly practiced by relatively established companies and has three pillars, according to the economist:

1. The “implicit guarantee” to take care of employees until retirement
2. Wages that are dictated by seniority
3. Company-based labor unions

In this relatively stable but rigid employment system, wages rise only gradually. Companies also place heavier emphasis on job security rather than compensating for short-term improvement in company performance or productivity, Nagai said.

After the bubble burst in the 1990s, income has declined across the income percentiles, and the share of low-income households has risen as those of middle- and high-income groups shrink.

HEAD OF JAPAN ECONOMICS, OXFORD ECONOMICS

The economist told CNBC that wage increments are decided by an annual spring negotiation known as Shunto, where the wages of unionized workers are decided by labor unions and management. What distinguishes this process from elsewhere is that the base-pay increase usually spreads across the entire seniority-based wage scale.

As a result, Nagai said, the system does not create a “top 1% earner” unlike Western compensation systems where top executives typically earn much more than other employees. In fact, the economist said that executive pay is “negligible” compared with places such as the U.S. He said, however, the elite in Japan have been “satisfied” with this flatter salary scale.

Rising part-time employment

For years, Japanese companies have also been converting regular workers — who could previously enjoy the comparatively privileged lifetime-employment system — to part-time workers.

This shift, according to Nagai, started in the early 2000s as companies attempted to “survive” the competition with rising emerging-market economies such as China, where labor costs are lower.

More recently, the increase in part-time workers may also be coming from greater labor-market participation among two demographics, Nagai suggested: women who need work, but may not be able to commit full-time due to childcare duties and seniors who are no longer able to enjoy retirement as their pension benefits are not large enough.

According to data from Japan’s statistics bureau, the number of non-regular employees rose 2.1% annually in 2019. That was far faster than 0.5% growth in regular employees.

“Although hourly wages have been rising faster for non-regular workers amid a shortage of
labour, they’re still paid much less compared to regular workers,” Nagai said. “In addition, the entry of women and the elderly into the labour market as part-timers has depressed hours per worker for several years.”

“The share of low-income households will keep rising as more part-timers work fewer hours,” he said.

Low inflation expectations

Meanwhile, lower inflation expectations have “really stabilized” in the country, Nagai said, arguing this has also contributed to the stagnation of wage increases. For years, the Bank of Japan has struggled to meet its ever-elusive 2% inflation target despite taking drastic measures such as bringing interest rates into negative territory.

The main beneficiaries of low interest-rate policies and aggressive quantitative easing are usually those who own real estate or stocks, Nagai said. The impact has been “relatively limited” due to the risk-averse nature of Japanese households, which generally do not invest in stocks and corporate bonds.

He said this could be another reason why monetary policy has had limited impact on income distribution.

Sluggish consumption

The economist said he was concerned that the disappearance of Japan’s middle class could lead to further stagnation in consumption.

Consumer spending slumped after a sales tax hike in October. It fell even further this year as lockdown measures intended to contain the coronavirus pandemic froze economies. Recent data from Japan’s Ministry of Economy, Trade and Industry showed May retail sales dropped 12.3% from last year.

Nagai said the “jury is still out” over the government’s consumption tax hike due to the unexpected impact of Covid-19. While the move had “certain justifications,” the economist acknowledged lower income groups are more sensitive to tax hikes.

The way out

A more dynamic human resource allocation could help lead Japan out of this situation, Nagai said.

The lifetime employment system has led to many people being underemployed, he said. At the same time, numerous young people are left “reluctantly” living with relatively low pay, despite higher contribution and productivity.

The “static” allocation of human resources has hampered efforts to get rid of the “deflationary equilibrium” in Japan, he said. While more graduates are now choosing start-ups instead of established companies, Nagai said it is still “not a major trend yet.”

Prime Minister Shinzo Abe’s government has tried to combat many of these issues, attempting to make the labor market more performance-based, Nagai said. But corporations and their management have been reluctant to change, impeding government efforts, he said.

“Reform of the established employment system will be a protracted process because it has for decades served as an integral part of the economy and society,” Nagai said. “Transforming the system will require concurrent reform of social insurance and tax systems.”

Under the Abe administration, the Ministry of Economy, Trade and Industry has also worked to promote “economic metabolism” whereby losers exit and upstarts can bring “new energy,” the economist said.

While authorities have made a good effort, he said it is difficult for change to happen in such a short period of time.

For example, Nagai said Japan lacks Chapter 11-like bankruptcy procedures to give those who fail “another try.” He cited this as another example of limited flexibility in the Japanese economy, leaving people “very afraid” to make changes.

Still, Nagai pointed out that “lots of changes” are already underway in Japan, as the labor shortage has pushed companies to raise salaries to attract younger people. At the same time, there have been more start-ups and Chinese companies which “pay a lot” for young talent.

The number of people quitting their jobs early in their career to seek opportunities elsewhere is also “becoming more than negligible,” he said.

Such moves, in his opinion, would free up the labor market to enable more dynamic resource allocation while also contributing to wage inflation.

Covid-19 could upend plans for older workers who want to retire | CORPUSVEC SOVEREIGN TALENTS

KEY POINTS

• The economic downturn prompted by the coronavirus comes at a particularly bad time for older workers.
• New research takes a look at how well those individuals may fare when it comes to working from home or finding new employment.
• Results are so-so.  Older workers are just as able to work from home, but fewer than half have the opportunity to do so. Meanwhile, new jobs often don’t offer the pay or benefits they may be looking for.

The economic downturn prompted by the coronavirus has been harsh for many American workers.

About 47.2% of Americans are jobless, according to the U.S. Bureau of Labor Statistics.

Meanwhile, many of those who are employed have had to abruptly pivot to remote work and may face pay cuts.

The sudden changes can be a shock, particularly for older workers who are approaching retirement and hoping to get in a few last years of earnings to top off retirement savings and cover health insurance needs before reaching Medicare eligibility.

In recent research, the Center for Retirement Research at Boston College looked at a couple of key concerns that will impact older workers’ careers: their prospects for working from home, and whether there are adequate job opportunities for those who are searching.

Will the work-from-home trend hurt older workers?

Older workers may be the last to go back to work due to the health risk posed by Covid-19. So the Center for Retirement Research set out to find out how well equipped they are to handle working from home.

The results show their prospects are mixed.

Only about 45% of older workers have positions that allow them to work remotely.

The remaining 55% likely will have issues returning to work, facing a choice of either putting their health at risk or delaying going back and further depleting their financial resources.

More from Personal Finance:
Here’s how much Medicare could cost you in retirement
What to know if you plan to claim Social Security during Covid-19
Here’s an easy, low-cost way to build a retirement plan like the pros

The good news is that age alone shouldn’t diminish older workers’ ability to work from home, the research found. Workers who are older actually are increasingly likely to have jobs that can be done remotely.

“It’s positive that they don’t have a relative disadvantage in terms of working from home,” said Center for Retirement Research director Alicia Munnell.

But that ability to work from home isn’t spread out equally. Those who have higher earnings are more likely to be able to work remotely. Women also tend to be able to work from home more. That’s consistent with other research that has pointed to women making job flexibility a priority, according to the Center for Retirement Research.

The CARES Act has increased 401(k) loan withdrawal limit—Here’s what you need to know

Do older workers have enough job prospects?

There is some optimism when it comes to job prospects for older workers, separate research by the Center for Retirement Research found.

The researchers analyzed the job listings on RetirementJobs.com, a site specifically aimed at older workers. Some of the positions were also advertised on CareerBuilder.com, which “indicate a willingness to hire older — as well as younger — workers,” the research said.

But positions advertised directly on the site tend to have lower average wages and are less likely to mention benefits. Examples include delivery or retail positions.

In the best of times, finding a match between a fully developed older worker with preferences and skills and a slot is hard and takes time.

Alicia Munnell

DIRECTOR OF THE CENTER FOR RETIREMENT RESEARCH AT BOSTON COLLEGE

Consequently, the work advertised might be suitable for bridge jobs, but not substantial full-time work, the research said. The opportunities also could pose difficulties for those who are looking to get health-care coverage through their employment until they reach Medicare eligibility age.

“It was encouraging if you took the site as a whole, because there were so many of these jobs where employers were open to older workers,” Munnell said. “But it’s less heartening if you look at the ones that are aiming for specifically for older workers.”

Haves versus have-nots

In looking at the research, a new group of haves and have nots emerge: those who have jobs and those who do not, Munnell said.

The big question is whether those who do not have jobs will find adequate opportunities to shore up their income in the coming months.

“In the best of times, finding a match between a fully developed older worker with preferences and skills and a slot is hard and takes time,” Munnell said. “When you have high levels of unemployment, it’s going to take a lot more time.”

It’s not exactly a repeat of the financial crisis of more than a decade ago, when everyone saw their retirement investments depleted and older workers were forced to work longer.

Laid off workers raiding their retirement funds

This time, personal retirement investments have likely rebounded with the market. Still, many older workers will need to work longer.

Before the pandemic, 50% of workers were at risk of not being able to maintain their standard of living in retirement. Now, high unemployment could make that worse.

One side effect may be that more people will claim Social Security early at age 62, just as they did in the financial crisis, due to the difficulty finding work, Munnell said.

“I expect it to spike up again in 2020 and ’21, just because people are going to just find it virtually impossible to find new work,” Munnell said.

Covid-19 could upend plans for older workers who want to retire | CORPUSVEC SOVEREIGN TALENTS

KEY POINTS

• The economic downturn prompted by the coronavirus comes at a particularly bad time for older workers.
• New research takes a look at how well those individuals may fare when it comes to working from home or finding new employment.
• Results are so-so.  Older workers are just as able to work from home, but fewer than half have the opportunity to do so. Meanwhile, new jobs often don’t offer the pay or benefits they may be looking for.

The economic downturn prompted by the coronavirus has been harsh for many American workers.

About 47.2% of Americans are jobless, according to the U.S. Bureau of Labor Statistics.

Meanwhile, many of those who are employed have had to abruptly pivot to remote work and may face pay cuts.

The sudden changes can be a shock, particularly for older workers who are approaching retirement and hoping to get in a few last years of earnings to top off retirement savings and cover health insurance needs before reaching Medicare eligibility.

In recent research, the Center for Retirement Research at Boston College looked at a couple of key concerns that will impact older workers’ careers: their prospects for working from home, and whether there are adequate job opportunities for those who are searching.

Will the work-from-home trend hurt older workers?

Older workers may be the last to go back to work due to the health risk posed by Covid-19. So the Center for Retirement Research set out to find out how well equipped they are to handle working from home.

The results show their prospects are mixed.

Only about 45% of older workers have positions that allow them to work remotely.

The remaining 55% likely will have issues returning to work, facing a choice of either putting their health at risk or delaying going back and further depleting their financial resources.

More from Personal Finance:
Here’s how much Medicare could cost you in retirement
What to know if you plan to claim Social Security during Covid-19
Here’s an easy, low-cost way to build a retirement plan like the pros

The good news is that age alone shouldn’t diminish older workers’ ability to work from home, the research found. Workers who are older actually are increasingly likely to have jobs that can be done remotely.

“It’s positive that they don’t have a relative disadvantage in terms of working from home,” said Center for Retirement Research director Alicia Munnell.

But that ability to work from home isn’t spread out equally. Those who have higher earnings are more likely to be able to work remotely. Women also tend to be able to work from home more. That’s consistent with other research that has pointed to women making job flexibility a priority, according to the Center for Retirement Research.

The CARES Act has increased 401(k) loan withdrawal limit—Here’s what you need to know

Do older workers have enough job prospects?

There is some optimism when it comes to job prospects for older workers, separate research by the Center for Retirement Research found.

The researchers analyzed the job listings on RetirementJobs.com, a site specifically aimed at older workers. Some of the positions were also advertised on CareerBuilder.com, which “indicate a willingness to hire older — as well as younger — workers,” the research said.

But positions advertised directly on the site tend to have lower average wages and are less likely to mention benefits. Examples include delivery or retail positions.

In the best of times, finding a match between a fully developed older worker with preferences and skills and a slot is hard and takes time.

Alicia Munnell

DIRECTOR OF THE CENTER FOR RETIREMENT RESEARCH AT BOSTON COLLEGE

Consequently, the work advertised might be suitable for bridge jobs, but not substantial full-time work, the research said. The opportunities also could pose difficulties for those who are looking to get health-care coverage through their employment until they reach Medicare eligibility age.

“It was encouraging if you took the site as a whole, because there were so many of these jobs where employers were open to older workers,” Munnell said. “But it’s less heartening if you look at the ones that are aiming for specifically for older workers.”

Haves versus have-nots

In looking at the research, a new group of haves and have nots emerge: those who have jobs and those who do not, Munnell said.

The big question is whether those who do not have jobs will find adequate opportunities to shore up their income in the coming months.

“In the best of times, finding a match between a fully developed older worker with preferences and skills and a slot is hard and takes time,” Munnell said. “When you have high levels of unemployment, it’s going to take a lot more time.”

It’s not exactly a repeat of the financial crisis of more than a decade ago, when everyone saw their retirement investments depleted and older workers were forced to work longer.

Laid off workers raiding their retirement funds

This time, personal retirement investments have likely rebounded with the market. Still, many older workers will need to work longer.

Before the pandemic, 50% of workers were at risk of not being able to maintain their standard of living in retirement. Now, high unemployment could make that worse.

One side effect may be that more people will claim Social Security early at age 62, just as they did in the financial crisis, due to the difficulty finding work, Munnell said.

“I expect it to spike up again in 2020 and ’21, just because people are going to just find it virtually impossible to find new work,” Munnell said.

Economists warn of U.K. jobs crisis ahead of crucial budget | CORPUSVEC SOVEREIGN TALENTS

KEY POINTS

• The “Summer Economic Update,” a de facto mini-budget, is expected to include tax cuts and new spending pledges in a bid to stimulate demand as the U.K. economy begins to reopen.
• Credit Suisse has projected that ending the country’s furlough scheme could result in unemployment rising from 3.9% to 10%, or 3.5 million people, in the second half of the year.
• “Ending the furlough scheme in October is like building a bridge that goes three quarters of the way across a river,” said Mike Bell, global markets strategist at JPMorgan Asset Management.

Shoppers wearing protective face masks walk through the rain on Oxford Street in London on June 18, 2020, as some non-essential retailers reopen from their coronavirus shutdown.

U.K. Chancellor of the Exchequer Rishi Sunak will deliver a fresh set of policy initiatives on Wednesday as Britain looks to spark an economic recovery from the coronavirus pandemic.

The “Summer Economic Update,” a de facto mini-budget, is expected to include tax cuts and new spending pledges in a bid to stimulate demand as the U.K. economy begins to reopen.

In his March budget, Sunak announced a £30 billion ($39 billion) spending package to tackle the immediate health and labor market impact of the pandemic and the nationwide lockdown it forced. Markets have since become accustomed to significant support announcements from the chancellor, and additional assistance from the Bank of England’s monetary policy bazooka.

However, with markets stabilized, lockdown mostly lifted and the virus seemingly under control in the country, few are expecting the kind of fiscal fireworks Sunak has delivered in the past.

WATCH NOWVIDEO01:43 UK facing the toughest labor market for a generation, LinkedIn manager says

“Instead, expect Sunak to announce targeted measures to lift the flagging parts of the economy and those areas that may struggle under the continued social distancing measures,” Berenberg Senior Economist Kallum Pickering said in a note Tuesday. For example, on Sunday the government announced a £1.6 billion package to support the arts sector.

The U.K. economy has contracted sharply since the beginning of the pandemic, with April’s 20.4% fall in gross domestic product the steepest monthly decline on record. Meanwhile borrowing surged to £103.7 billion ($128.9 billion) in the April-May period, meaning public sector debt surpassed GDP for the first time since 1963.

However, central to the country’s ability to weather the economic storm so far has been the furlough scheme, which has supported more than 30% of the nation’s jobs and meant that the steep drop in output has not filtered through to the labor market as yet. The program has been credited with preventing the country’s looming recession from morphing into a deep and prolonged depression.

Impending ‘jobs crisis’

Sunak has previously indicated that the furlough scheme is likely to be tapered from August and end in October, but Credit Suisse has projected that this could result in unemployment rising from 3.9% to 10%, or 3.5 million people, in the second half of the year.

In a note Monday, the bank’s economists suggested it was unlikely that the 9.3 million furloughed workers would be reabsorbed into the jobs market, with the end of furlough bringing about another wave of redundancies.

“This is because, beyond the near-term pickup, we think there is a risk that the recovery slows down as consumer caution due to the persistence of the virus and social distancing restrict domestic demand and Brexit risks weigh on sentiment” the note said.

WATCH NOWVIDEO02:52 Up to 1.5 million Brits will struggle to find work as UK reopens: economist

Credit Suisse urged Sunak to either extend the furlough scheme beyond October or replace it with a scheme that subsidizes wage costs or cuts National Insurance contributions for the sectors likely to be hardest hit, like retail, travel and hospitality.

Mike Bell, global markets strategist at JPMorgan Asset Management, told reporters at a virtual roundtable Tuesday that the British economy was “propped up in a state of suspended animation” by the furlough scheme. He warned that many of the currently furloughed workers would end up unemployed once the scheme is lifted as a number of sectors struggle to recover.

“Ending the furlough scheme in October is like building a bridge that goes three quarters of the way across a river,” Bell said. He stressed that the signals of economic recovery in the U.K. do not account for the potential fall in consumer spending and economic activity, should furloughed jobs end up being lost.

Potential policy moves

Temporary National Insurance cuts are among the potential policy initiatives floated in advance of Sunak’s speech, along with subsidies for businesses hiring trainees. Other possible announcements include a temporary cut to VAT (currently at 20%), a reduction or scrapping of the property tax known as stamp duty for properties worth up to £500,000, and temporary exemptions to business property taxes.

Some newspaper reports over the weekend suggested that various initiatives could be announced on Wednesday but implemented in the Fall budget, which Berenberg’s Pickering suggested would be counterproductive, particularly in relation to the stamp duty cut.

 Economic scarring from pandemic is still too early to see, strategist says

“Rather than stimulating a housing market recovery, it would delay it by incentivizing people to wait until the tax cut before buying a house,” he said, arguing that any policies announced Wednesday should be rolled out as soon as possible.

“The risks of a policy mistake are asymmetric – with greater costs associated with doing too little rather than too much,” he added.

Berenberg estimates that U.K. output is currently around 15% below its pre-recession peak, given data points like May’s 10% rebound in retail sales and more optimistic survey data. But it does not expect GDP to return to the level seen in the fourth quarter of 2019 until early 2023.

“The uncertainty about the precise shape of the recovery, as well as continued downside risks coming from a second wave of the virus and a disorderly exit from the single market at the end o