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Did eating out help out the UK economy?

Introduction

In an attempt to aid the UK economic recovery, Chancellor Rishi Sunak introduced the “Eat Out to Help Out” Scheme in early August, which received over 130 million claims during its course of operation. The scheme, which provided discounts on food and drinks in participating restaurants, was aimed to protect jobs and provide a much-needed boost to the hospitality sector, where 1.4 million workers out of almost 2 million in the industry were put on the furlough scheme over lockdown. These discounted meals, amongst other factors, weighed on UK prices, contributing to the fall in inflation to the lowest rate in over four years and adding pressure for the Bank of England to take action to stimulate the economy.

Scheme overview

The “Eat Out to Help Out” Scheme, which was in place between August 3rd and August 31st, enabled participating establishments to give discounts to diners, which they can then be reimbursed for by the government. This discount included 50% off food items and non-alcoholic beverages on Mondays, Tuesdays, and Wednesdays, up to £10 per person. The purpose of the scheme was to stimulate spending in the hospitality sector after months of lockdown, where 80% of businesses in the industry were forced to close in April.

A total of 84,700 restaurants signed up to participate in the scheme, giving out a discount on over 100 million meals during the period, worth at least £522m. The number of restaurant diners significantly rose as a result, with booking site OpenTable seeing a 216% increase in restaurant reservations on the August Bank Holiday compared to the same period last year. Even after the scheme was discontinued, several restaurant chains, including Wetherspoon’s, Tesco Café, and Franco Manca, have continued to run and fund the scheme themselves to benefit from the influx of customers. Following on from the scheme’s success, a winter version is being kept under review by the Treasury to provide a further boost to the hospitality sector, a government minister has confirmed.

Inflation rate falls as restaurant-goers rise

Prices of food and drinks

The “Eat Out to Help Out” Scheme caused restaurant prices to decline in August, contributing to the UK’s inflation rate dropping to near-zero levels. This trend was reinforced by another move by the Chancellor to support the hard-hit hospitality sector – a cut in the VAT rate for restaurants, hotels, and admissions to attractions. VAT currently stands at 5%, below the regular 20% rate, with the VAT reduction lasting until January 12th 2021. The combined effect of these policies led hotel and restaurant prices to fall by 2.8% in August year-on-year, the first annual contraction since the series began in 1989. This comes as the ONS reports that CPI inflation experienced a similar fall, with consumer prices rising at an annual rate of 0.2% in August, down from 1% in July, representing the lowest inflation rate since December 2015.

Other effects on inflation

Although food prices played a key role in the fall of CPI inflation, a similar trend was also experienced by other categories such as clothing and footwear, which contracted at an annual rate of 1.4% in August. Airline fares also experienced their first decline since records began due to the pandemic-induced travel restrictions. The UK core inflation, which excludes tobacco, food, alcohol, and energy products, fell to 0.9% in August from 1.8% the month before, demonstrating a similar decline to non-food related products. Therefore, it is the combined effect of declining prices of food, drinks, and a slowdown in other categories that caused a steep 0.8 percentage points fall in CPI inflation between July to August. According to Thomas Pugh, UK Economist at Capital Economics, this August figure is likely to represent the low point for inflation, however, it will likely take a few years until the UK economy is performing strongly enough to be able to sustain the 2% inflation target.

The hospitality sector boomed, but at what expense?

Not everyone benefited from the scheme in the same way as the hospitality sector, with supermarket sales falling by approximately £155m in August compared with the previous month. The year-on-year growth in total sales, which was at 14.4% in the 12 weeks to August 9th, fell to 10.8% in the 12 weeks to September 6th. This trend is particularly evident in alcohol products, with wine and beer sales in supermarkets down 5% and 10% month-on-month respectively, as Zoom “virtual drinks” turned into visits to restaurants and pubs. Despite this setback, the grocery sector continues to demonstrate strong annual growth, particularly online where sales are more than 75% up in August compared to the same period last year.

Sources

https://www.ft.com/content/3684b696-9c31-491e-be0e-6232a2a6d13d

https://www.bbc.co.uk/news/uk-54173658

https://www.heart.co.uk/news/eat-out-help-out-scheme-winter/

https://www.mirror.co.uk/money/restaurants-extending-eat-out-help-22581338

https://www.theguardian.com/business/2020/sep/15/supermarkets-eat-out-to-help-out-scheme-covid

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