A second lockdown would pitch the economy into full-blown depression

Renewed restrictions won’t just crush the recovery, but will send the country into a calamitous spiral of fear

If the definition of insanity is to keep doing the same thing over and over, expecting different outcomes, then Europe has collectively succumbed to just such a state of lunacy. We’ve tried draconian lockdowns once, and they plainly haven’t worked; this doesn’t seem to have deterred our political leaders from trying again.

All over Europe, large chunks of economic and social activity are once more being forcibly closed down in the hope of suppressing a virus which has become stubbornly resistant to eradication or even lasting forms of control. France’s President Macron was if anything even more emphatic than Boris Johnson over the summer in insisting that a second national lockdown was out of the question; now he’s gone ahead and done it. Spooked by spiralling infection rates and predictions of a multiplying death toll to come, isn’t it only a matter of time before the UK follows suit?

No one should deny the scale of the challenge; the whole of Europe has been caught unawares by the venom and speed of the second wave of infection. But the prospect of repeated rounds of lockdown is sucking the lifeblood out of a promising economic recovery, and is so obviously not a sustainable approach to managing the disease that hysteria might indeed be an appropriate term to apply to the actions of our political leaders.

It may be, as the Government’s Scientific Advisory Group on Emergencies (SAGE) predicts, that failure to lock down anew will result in a much worse wave of contagion and deaths than the first. Equally certain, however, is that a second national lockdown is going to more than double down on and entrench the economic destruction wrought earlier this year.

For now, the long-run economic consequences of the pandemic are unclear; it’s impossible to say how persistent some of the changes we’ve seen in household behaviour might be. Will spending on hospitality, entertainment and travel be permanently harmed? Are people becoming more risk averse? What does it say about the future of employment and consumption if citizens increasingly work from home in loose associations that transcend corporate borders? For now, we can’t know.

What does seem probable, however, is that the more we lock down, the more embedded these behavioural changes will become. Return to the old normality gets steadily less likely, and a prolonged depression, with longlasting consequences for well-being and livelihoods, much more so.

One of the big early changes was a surge in household saving, which in the UK rose from 9.1 per cent of earnings in the first quarter of this year to an astonishing 28.1 per cent in the second. This was not the result of growing risk aversion as such, but of Government diktat. Imprisoned in their own households people weren’t spending not because they couldn’t afford it, but because they were unable to.

Evidence of how artificial the consequent collapse in demand was came the moment the restrictions were lifted. In September, for instance, retail sales were back at pre-pandemic levels and actually somewhat higher than the same month last year. There had been no collapse in willingness to spend, underpinning hopes that the economy might soon be operating relatively normally again.

But what we see today is a different kind of propensity to save, and a much more familiar one – fear of losing your job and regular source of income. Even when not directly impacted by lockdown, moreover, businesses are almost universally using the pandemic to downsize and automate.

Saving for a rainy day is a laudable characteristic when practised at an individual household level; up until the pandemic, many Brits seemed largely to have forgotten the habit. Yet if we all suddenly start spending less and saving more at the same time, it creates a self-reinforcing demand shock and becomes extraordinarily dangerous – a phenomenon that the economist, John Maynard Keynes, called “the paradox of thrift”. One man’s saving is another man’s livelihood, and it soon shows up in rising joblessness.

As I say, up until late last month, things looked reasonably hopeful, with the economy having apparently escaped long-term harm and recovering swiftly from the medically induced coma of the first lockdown. Bankers could scarcely believe their luck; thanks to the Government’s various business support measures, the expected surge in insolvencies and structural unemployment failed to materialise, encouraging them to go on a splurge of mortgage lending and to reduce their bad debt provisioning.

But the optimism has given way to resigned fatalism. As one seasoned City observer puts it, it’s like standing on a beach, watching the water drain away ahead of an incoming, though as yet unseen, tsunami. You want to run, but you know it’s pointless.

That it might have happened anyway, regardless of any Government imposed lockdown, is possible; there is nothing quite so contagious as fear. Yet the more the Government locks down, the more it compounds the sense of emergency, and therefore state of economic paralysis. Thanks to renewed restrictions, depression economics are fast making an unwelcome return.

Neither the Treasury nor the Bank of England can reasonably be accused of failing to act. Huge amounts of support have been on offer to counter the effects of lockdown, with their costs largely financed by the Bank of England via purchases of government debt. Another £100 billion of so-called “quantitative easing” is widely expected to be announced by the Bank next week to tide the Government over until Christmas. The way things are going, more still will be required in the New Year.

The term “uncharted waters” has been much overused over the past six months, yet it is fair to say that right now we seem to have moved way beyond the outer limits of previous monetary and fiscal experimentation. Nothing like it has ever been tried before. Again, the long-term consequences are anyone’s guess.

The Government’s hope is that a vaccine, and/or its “moonshot” mass-testing ambitions, will come to the rescue. Judged by the shortcomings of test, track and isolate so far, the former seems rather more probable than the latter. How much of an economy is left by the time it arrives is a different matter.