Les­sons from Europe: could a sec­ond wave hold back re­cov­ery in the UK?

Con­sumer con­fi­dence in the eu­ro­zone has fal­tered and we may be just steps be­hind, writes Tom Rees

The Daily Telegraph - Business - - Business -

The UK econ­omy could just be in the eye of the Covid storm.

The spike in in­fec­tions seen in the past two weeks is con­cern­ing econ­o­mists as well as health ex­perts. A record-break­ing re­bound in GDP ex­pected in the third quar­ter could be a brief respite rather than the start to a roar­ing re­cov­ery, fore­cast­ers fear.

A sec­ond wave of in­fec­tions and re­stric­tions threat­ens to send the re­cov­ery into re­verse this au­tumn, with ex­perts warn­ing the UK is again more vul­ner­a­ble than most.

“A sec­ond full lock­down, in an al­ready weak­ened econ­omy, would likely be even more dam­ag­ing than the first one,” warns Ian Stewart, Deloitte chief econ­o­mist.

“Rarely has hu­man health mat­tered as much for the econ­omy as it does today. The path of the dis­ease, and our success in con­tain­ing it, holds the key to eco­nomic ac­tiv­ity.”

Once again the UK ap­pears to be just a few steps be­hind the worst-hit parts of Europe, with the likes of Spain and France see­ing daily cases surge past the heights hit in March. Daily cases have al­most tripled in two weeks in the UK, with hotspots, in­clud­ing Birm­ing­ham and Greater Manch­ester, see­ing re­open­ings rolled back.

Ev­i­dence from the eu­ro­zone and the US sug­gests the re­cov­ery in house­hold con­fi­dence and con­sumer-fac­ing in­dus­tries fal­tered af­ter a sec­ond wave of cases struck. The resur­gence of the virus was blamed by ser­vices firms for a slow­down in the eu­ro­zone in Au­gust as seen in the pur­chas­ing man­agers’ in­dex (PMI) – an early growth sig­nal watched closely by in­vestors.

Hard-hit Spain saw its ser­vices sec­tor fall back into con­trac­tion ter­ri­tory in the lat­est PMI af­ter re­newed travel re­stric­tions all but ended its cru­cial sum­mer tourism sea­son. France and Italy have also seen sim­i­lar pull­backs as cases mount.

A sec­ond wave has had a dou­ble whammy for the Span­ish econ­omy, reimposing re­stric­tions and dent­ing frag­ile con­fi­dence. Mea­sures have also been reim­posed to slow the spread of the dis­ease among young Spa­niards, such as in­tro­duc­ing bar cur­fews and shut­ting night­clubs.

Fol­low­ing the spike in cases, house­hold con­fi­dence in Spain has re­versed again, push­ing back to just above the lows seen in April, ac­cord­ing to the Euro­pean Com­mis­sion con­sumer sen­ti­ment sur­vey. And Ci­tymap­per’s in­di­ca­tors track­ing move­ment also sug­gests the re­cov­ery in ac­tiv­ity was damp­ened in Barcelona and Madrid in re­cent months.

How­ever, the sec­ond wave in cases has cru­cially not led to a large in­crease in ad­mis­sions to hos­pi­tal and deaths in Spain, with in­fec­tions be­ing borne largely by the young. That has led Span­ish au­thor­i­ties to re­sist harsher mea­sures and could also help West­min­ster hold off from reimposing the most eco­nom­i­cally dam­ag­ing re­stric­tions if a sim­i­lar pat­tern emerges in Bri­tain.

Paul Dales at Cap­i­tal Eco­nomics says this would likely mean the blow “would be much more mild than the catas­tro­phe and col­lapse in the econ­omy we saw in the first wave”.

“It will prob­a­bly be a case of the pace of the re­cov­ery slow­ing rather than go­ing into re­verse,” he pre­dicts. “If you look at what hap­pened in the US, there are cer­tainly signs the re­cov­ery flat­tened off, but it wasn’t the case that the econ­omy has gone back­wards again.”

In the US, a sec­ond wave ap­pears to be slow­ing rather than scup­per­ing the re­cov­ery. Busi­nesses re­sponded to surg­ing in­fec­tions by lay­ing off work­ers at a faster pace, while con­sumer con­fi­dence has also strug­gled to re­cover as the virus lingers.

New weekly claims for un­em­ploy­ment ben­e­fits are still at close to 1m and con­tin­u­ing job­less claims rose again at the end of Au­gust. How­ever, eco­nomic in­di­ca­tors have largely been im­prov­ing in re­cent months as its econ­omy adapts to life with the virus cir­cu­lat­ing.

None­the­less, wide­spread lo­cal lock­downs, re­newed re­stric­tions on busi­nesses and more-cau­tious con­sumers could be enough to cre­ate a feared dou­ble dip in the UK. Econ­o­mists at ING warn that tougher re­stric­tions would lead to an­other fall in GDP in the fourth quar­ter.

They pre­dict that out­put would de­cline even in a sce­nario where a national lock­down is avoided but re­stric­tions be­come grad­u­ally tighter and un­cer­tainty spikes, hurt­ing the food, hos­pi­tal­ity and tourism in­dus­tries most.

In that out­come, GDP tum­bles by an an­nu­alised 9.5pc com­pared to the pre­vi­ous quar­ter but suf­fers a 35pc slump if a full national lock­down re­turns, re­vers­ing most of the gains in out­put seen in the third quar­ter.

How­ever, its cen­tral case sees the re­cov­ery con­tin­u­ing if re­stric­tions are kept lo­cal and largely lim­ited to pri­vate gath­er­ings rather than busi­nesses.

Tar­geted lo­cal lock­downs could limit the dam­age if of­fi­cials act fast enough. Gold­man Sachs es­ti­mates that the lo­cal re­stric­tions reim­posed by the Gov­ern­ment only cover about 12.5pc of GDP, but its an­a­lysts are bracing for worse.

The re­cent rise in in­fec­tions in the UK and else­where has boosted the risk that the re­cov­ery is un­der­mined by “the pre­cau­tion­ary be­haviour of house­holds, the wide­spread clo­sure of schools and a greater in­ci­dence of lo­cal con­tain­ment mea­sures”, says Sven Jari Stehn, an econ­o­mist at Gold­man.

He ex­pects an­other national lock­down to be avoided but warns the will­ing­ness of the Gov­ern­ment to use mea­sures could mean de­mand “will face stiffer head­winds than we had en­vis­aged. The sec­ond-quar­ter ex­pe­ri­ence demon­strates that the UK econ­omy is par­tic­u­larly re­liant on in­dus­tries that are es­pe­cially sus­cep­ti­ble to so­cial dis­tanc­ing”.

Af­ter suf­fer­ing the big­gest sec­ondquar­ter blow to GDP, that could mean a sec­ond wave of Covid in­fec­tions hits Bri­tain harder than other coun­tries again.

Close to 30pc of spend­ing is vul­ner­a­ble to so­cial dis­tanc­ing if new mea­sures are im­posed or scared con­sumers stay at home. That high pro­por­tion of so­cial con­sump­tion on the likes of ho­tels, restau­rants and trans­port is well above other de­vel­oped coun­tries, ac­count­ing for just 15pc to 20pc of spend­ing in the US, France and Ger­many.

The UK also has a num­ber of other head­winds threat­en­ing to blow the econ­omy off course this au­tumn. A sec­ond Covid wave could co­in­cide with a sharp spike in un­em­ploy­ment when the fur­lough scheme ends and an­other dam­ag­ing Brexit stand­off.

Even if a national lock­down is avoided, an­a­lysts be­lieve the storm has not passed over the UK econ­omy just yet.

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