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 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.