Because renewed lockdown is intended to be shorter and less strict, the damage to economic growth is likely to be smaller than previous measures. If it can help to bring Covid-19 under control, the longer-term benefits to the economy could outweigh the short-term costs.
The second lockdown in England is due to last at least until early December. What are the likely effects on an economy that was already suffering as a result of Covid-19 and the earlier policy responses to the pandemic? And are we headed for another recession?
The economic impact of the autumn lockdown is likely to be smaller than the first lockdown: partly because it is expected to last less time; partly because restrictions are less strict; and partly because households, businesses and the government are better prepared than they were in the spring.
The longer-term benefits to the economy through increased confidence and a return to normal levels of demand with Covid-19 under control could be larger than the short-term costs, although this is difficult to quantify with much confidence.
How did the first lockdown affect the economy?
Economic activity as measured by gross domestic product (GDP) was around 25% lower in April, during the first full lockdown period, compared with February, which was the last month before restrictions came in.
The degree to which this was down to lockdown restrictions and how much to voluntary social distancing (that is, how much of the reduction in GDP would have taken place if the government had not imposed restrictions) is discussed in an earlier article on the Economics Observatory: Coronavirus and the economy: what are the trade-offs?
The combination of voluntary and mandated changes in behaviour reduced people’s consumption, closed businesses and reduced the hours worked by those in employment. It is likely that productivity fell and unemployment subsequently rose due to social distancing measures.
The long-term impact of such lockdowns is impossible to know: we cannot be certain how much of the reduction in activity would have happened without a lockdown; and lockdowns can produce positive economic returns if they help to control the spread of the virus.
In this case, the short-term fall in activity could be much smaller than the long-term increase as a result of greater business and consumer confidence once the virus is behind us (Wren-Lewis, 2020). So when we talk about the economic consequences of a lockdown, we are not comparing them to a situation in which the government chose not to respond to Covid-19, but to one in which a rise in the prevalence of Covid-19 was not a factor.
During the spring lockdown, when we compare with February, the largest fall in GVA (‘gross value added’) was in the hospitality sector, which includes pubs and restaurants. GVA in this sector was 91% lower in April than in February and, at its peak, the Coronavirus Job Retention Scheme (CJRS) was covering 74% of its employees.
In contrast, public administration GVA was unchanged between February and April, while finance, property and utilities saw their economic activity fall by less than 10%.
What has happened since the first lockdown restrictions were lifted?
Since then, the spread of Covid-19 slowed, some restrictions were lifted and economic activity returned towards normal levels in many areas.
According to the Office for National Statistics (ONS), activity in the hospitality sector was still 14% lower in August (the latest month for which there are estimates) than in February. The arts and recreation sector was still 28% below its February level, while transport, administrative support and health services were also still seriously affected. Figure 1 illustrates the varying degree of economic growth and returning of furloughed staff between the peak of the first lockdown and August.
Figure 1: GDP and furlough use by sector
Total GDP in August was still around 10% lower than in February, and early indicators of growth, such as purchasing managers indices, suggest that there was little, if any, economic growth in September and October (Staton, 2020; NIESR, 2020). Note that monthly estimates may be subsequently revised by the ONS as more data arrive.
What does this mean for the effects of a second lockdown?
The government announced its second national lockdown on 31 October. On 5 November, it extended the CJRS, and the Bank of England announced a further £150 billion of quantitative easing.
Some sectors that were largely closed in April are expected to be less affected this time: manufacturing and construction are ‘encouraged’ to continue operating, while schools will remain open. There are other differences: firms and employees will have adjusted to working from home; other countries’ success in controlling the virus may mean that demand for UK exports is less negatively affected; and the CJRS now includes ‘flexible’ part-time furloughing.
The partial re-opening means that the economy is also starting from a lower point: perhaps around 10% lower. This means that even if the level of activity were to drop to the same level as in April, it would represent a smaller percentage reduction: around a 15-20% fall. This is represented in stylised form in Figure 2, showing the smaller fall with the arrow.
Figure 2: Monthly GDP
Taking the post-April recovery sector by sector, we can make some assumptions about how far activity in each sector is likely to drop back towards its April level (or beyond). One estimate, based on this sectoral approach, suggests that GDP could drop by around 12% in November compared with October, assuming 90% of the post-April recovery in the hospitality sector is temporarily ‘lost’, with smaller reductions in other sectors (NIESR, 2020).
There is a large degree of uncertainty around any estimates. One significant source of uncertainty is ‘spillover effects’: the knock-on impacts of disruption in one industry to another. For example, the closure of pubs and restaurants may have a major impact on manufacturers of food and drink.
The fact that schools are being kept open and many parents are able to go to work, unlike in the spring lockdown, is likely to have positive spillover effects on the rest of the economy: this creates a larger benefit for the economy than would be implied by simply looking at the share of education in GDP. (This is clearly not the only criterion to use when deciding whether to keep schools open.)
A further significant source of uncertainty lies in the changing habits of consumers. In August, retail sector GVA returned to its February level, while more than 10% of jobs in the sector were furloughed and many shops had closed. A continued increase in online shopping could represent a large shift in Christmas shopping habits, mitigating the effects of lockdown on retail.
Do we face a ‘double-dip’ recession?
An earlier article on the Economics Observatory – What will the shape of the recovery tell us about the best policy response? – considers the possible shapes of an economic recovery, including V-, U- and L-shaped, plus a wave and a swoosh. The Bank of England is now forecasting a W-shaped recovery, but with only one quarter of negative growth expected, this does not necessarily imply a double-dip recession.
Although NIESR’s Business Cycle Dating Committee prefers to think of recessions in terms of sustained falls in economic activity, they are typically defined in the media as two consecutive quarters of negative growth. It is possible that the ‘recession’ in the first half of 2020 could be followed by one in the fourth quarter of 2020 and the first quarter of 2021.
If November GDP were to be 12% lower but October and December unaffected, this would reduce quarterly growth by around 4 percentage points. This is far from certain. If the second lockdown ends, as is currently intended, on 2 December and economic activity returns to usual, there is an outside chance that growth may even be positive across the quarter overall (October to December), although forecasters so far seem to think that this is unlikely.
Looking ahead to the first quarter of 2021, the November forecasts by the Bank of England and NIESR, which were made after the announcement of the new lockdown, expect a return to growth. But the situation with Covid-19 could worsen, leading to an extension of lockdown or a deepening of consumers’ worries about the public health situation, which would continue to weigh on the recovery into the new year.
If this persists, then negative growth in the fourth quarter could be followed by a further fall in the first quarter of next year, causing a double-dip recession.
Where can I find out more?
- The ONS release official monthly GDP estimates on or around the 10th of the second month afterwards. The first release for the fourth quarter of 2020 will be in February, and confirmation or otherwise of a double-dip recession will come with the release of GDP data for the first quarter of 2021 in May 2021.
- The Bank of England’s November Monetary Policy Report, which describes why they forecast a fall in GDP for the fourth quarter of 2020 followed by a rise in the first quarter of 2021, can be found here.
- Calculations by the National Institute of Economic and Social Research, which also reference a detailed simulation of a ‘second wave’ early in 2021, can be found here.
- Fear of coronavirus, not lockdown, is the biggest threat to the UK’s economy: Economist Simon Wren-Lewis, writing in The Guardian in June, argued that lifting restrictions won’t ease the recession: people need to feel the outbreak is under control.