After nearly a year of coronavirus restrictions the effect of a third lockdown on the UK economy will be less severe than the initial shock last March, in part because companies are far better prepared.
News of a mutant Covid strain that is more transmissible and has sent cases skyrocketing will see GDP dip around three per cent in the third quarter, according to James Smith, ING’s Developed Markets Economist.
“That said, the dip is unlikely to be as bad as the first lockdown. Sectors that are able to operate, even partially, are better geared up. And a wider range of industries, including construction/manufacturing, are able to continue operating.”
ING predicts economic activity will drop to around 15 per cent below its pre-pandemic level, compared to the staggering 25 per cent drop seen at the start of the outbreak.
Hopes of a recovery by spring rest largely on how successful the government’s vaccine rollout is as it will enable the removal of restrictions. While the government has announced plans for seven large-scale vaccination centres there are still concerns of a bottleneck in the delivery system.
ING remains optimistic: “Our base case is that most, if not all, restrictions will have largely gone by the summer months,” Smith says.
Even with this confidence, the UK is bracing itself for a double-dip recession after the sharpest decline in history in the second quarter last year.
Figures from the British Chambers of Commerce released this week revealed the reintroduction of lockdown restrictions “weighed heavily on the key drivers of growth”.
Once Brits are allowed out ING anticipates pent-up demand given the savings that have reportedly been built up during three lockdowns. But, as was the story for much of 2020, a lot of this will depend on what happens to government support, namely wage subsidies.
Chancellor Rishi Sunak extended the furlough scheme until April but sectors most affected by the restrictions, such as leisure and travel, may need to be weaned off gradually, or unemployment could once again surge.
“An element of this is inevitable, and we think this will prevent a return to the economy’s pre-virus size this year or indeed, most likely, for most of 2022.”