If anyone was still harbouring hopes that the UK economy was on a steady path to recovery, this weekend’s announcement of a further month of national lockdown will have been a bitter blow.
A month ago, Andy Haldane, the Bank of England’s chief economist, urged people not to sink into a “contagious pessimism” that would do unnecessary damage to the economy. But now, all three of the risks he acknowledged at the time — a worsening of the virus and the consequent restrictions, rising unemployment and a disorderly Brexit — appear to be crystallising.
When the monetary policy committee meets later this week, its new forecasts are likely to show that the summer’s rebound in growth was weaker than the BoE expected in August; that output will at best barely grow in the fourth quarter; and that the scars left on the economy by the pandemic will be deeper and longer-lasting than hoped.
The new stay-at-home order will reinforce the case for the MPC to launch a fresh round of quantitative easing on Thursday — with analysts predicting it could add a further £50bn to £150bn to its target stock of asset purchases. But economists say this will do very little to boost growth at present — although it may ease the government’s issuance of gilts to fund further fiscal stimulus.
“Anything the MPC does now will do little to prevent a renewed recession if virus cases continue to rise and the government ramps up restrictions,” said Ruth Gregory, at the consultancy Capital Economics, while adding that monetary easing would still help keep companies afloat and limit job losses.
“For many firms, national lockdown marks the start of a bleak midwinter,” Carolyn Fairbairn, the outgoing CBI director-general, said in a tweet after the government announced the renewed national closure of hospitality, leisure and non-essential retail businesses.
The timing will be especially punishing for retailers, coming at the height of the crucial pre-Christmas season. Helen Dickinson, chief executive of the British Retail Consortium, said the spring lockdown had cost non-essential retailers £1.6bn a week in lost sales, but that the new closure would cause “untold damage”, since in the run-up to Christmas, “these losses are certain to be much bigger”.
Andrew Goodacre, chief executive of the British Independent Retailers Association, said the timing could not be worse for small shops, since “Christmas shopping was already starting and will now end up being carried out online”.
But while the impact on some sectors will be acute, the overall hit to GDP will not be as severe as in the first national lockdown, with education set to continue, and the government making it clear that manufacturing and construction sites should remain open.
Kristalina Georgieva, the IMF’s managing director, said last week she did not expect a second wave of the virus to lead to the “dramatic drop” in output seen in March, because “most of the negative impact on contact-dependent industries has already happened”, other sectors had adapted to doing everything virtually where possible, and policymakers had taken extraordinary steps to “put a floor under the economy”.
But the IMF’s latest forecasts for the UK — issued after tiered regional measures were introduced, but before the new national lockdown — are still bleak: the fund expects UK output to have shrunk 10.4 per cent over the course of 2020, far worse than the BoE forecast in August, and to remain between 3 and 6 per cent below pre-pandemic levels in the medium term.
Julian Jessop, former chief economist and head of the Brexit unit at the Institute for Economic Affairs, has been more upbeat than many about the prospects for the UK labour market, but still struggled to find sources of optimism after the new lockdown. With schools open, businesses better prepared and a clearer exit strategy, the economic hit should be less severe than in the spring, he said — but even if it were only a fifth as bad, this would still mean a hit to GDP of at least 5 per cent.
And if the new restrictions on activity are less stringent than those imposed in March, so too is the extent of government support on offer for businesses and workers.
Chancellor Rishi Sunak has been forced to reinstate the UK’s furlough scheme, just days after its expiry, subsidising 80 per cent of wages for any hours that employees do not work (much to the outrage of observers in the north of England, where local leaders’ demands for this increase in generosity were ignored two weeks ago).
He has also announced new grants for businesses that are required to close; provided a further £1.1bn for local authorities to offer one-off support to businesses; and extended mortgage holidays that had been set to expire at the weekend.
However, there is no new help for the self-employed — who will receive a lower level of help than furloughed employees even if they qualify for grants under the government’s Self-Employed Income Support Scheme. Many are not eligible for this scheme and are already reliant on benefits — and some could see these cut later in November, unless the government extends its suspension of the so-called minimum income floor, which limits payments to self-employed people with low earnings.
Nor is there any additional help yet for renters, who are more likely than homeowners to have run up arrears with their landlord, or fallen behind on other debts, since the start of the pandemic.
“The government should have acted decisively much sooner and now families face a grim winter,” said Frances O’Grady, general secretary of the TUC. “Ministers must do more to protect jobs and prevent poverty.”