How a third lockdown will impact the UK economy

LaToya Harding
·4 min read
Britain's Prime Minister Boris Johnson looks on during a news conference in response to the ongoing situation with the coronavirus disease (COVID-19) pandemic, inside 10 Downing Street, London, Britain, December 19, 2020. REUTERS/Toby Melville/Pool     TPX IMAGES OF THE DAY
UK prime minister Boris Johnson announced a return to harsh lockdown on Monday evening, saying a stay-at-home order and business closures were necessary to curb the spread of COVID-19. Photo: REUTERS/Toby Melville/Pool

The UK economy faces a sharp downturn as a result of its third national lockdown, economists have warned.

Britain is headed for a double-dip recession, with economic activity weighed down by lockdown and adjustments to leaving the European Union (EU).

UK prime minister Boris Johnson announced a return to harsh lockdown on Monday evening, saying a stay-at-home order and business closures were necessary to curb the spread of COVID-19. Non-essential retail and schools have been closed.

Cabinet minister Michael Gove said the tough restrictions could remain in place until mid-March.

Analysts at JP Morgan, Deutsche Bank, and Morgan Stanley all slashed their forecasts for UK GDP growth on Tuesday in response.

READ MORE: Job losses, GDP collapse, and soaring debt: How COVID-19 ravaged the UK economy

Morgan Stanley said the new restrictions will have a similar impact to last year’s March lockdown, which shaved around 2 percentage points off headline activity. The investment bank said UK GDP could shrink by as much as 3% in the first three months of 2021.

JP Morgan downgraded its expectations for UK growth from 0.1% to -2.5%. Deutsche Bank said a double dip recession “now looks inevitable”.

“We expect output to contract by around 1.4% quarter-on-quarter in the first quarter of 2021,” the German lender said. “Thereafter, a vaccines' boost should see GDP grow by little over 3% quarter-on-quarter over the next two quarters before gradually easing.

“The good news is that our 2021 growth projection remains broadly unchanged despite the Q1 downgrade.”

Watch: What people think of the new national lockdown

The new restrictions are stricter than those in place during November’s lockdown and more comparable to the first lockdown in March 2020.

The pound came under pressure on Tuesday morning, reflecting investor concerns about the economic impact of new lockdown measures.

“This is bad,” Ludovic Subran, chief economist at Allianz SE, said in a Bloomberg TV interview. “The UK is a service economy, so it’s all about shutting down services, and it’s bad because things like schools are a big part of GDP. Also because they play a role in how much parents are able to work.”

READ MORE: Sunak told UK business lockdown support doesn't go far enough

The outlook marks a far cry from what economists had hoped would happen. As recently as last summer, the Bank of England (BoE) said it expected the economy to return to normal by spring 2021.

However, analysts think the economic hit will be smaller than the first lockdown (when GDP fell to 24.7% below its level in February 2020), as businesses and households are now better prepare.

“More people are likely to go into work than last April, with businesses better prepared to accommodate social distancing and the government more actively encouraging those who cannot work at home to do so,” said Allan Monks, JP Morgan’s chief UK economist.

Paul Dales, chief UK economist at Capital Economics, said: “This time the manufacturing and construction sectors will stay open and many employees in the services sector are more able to work from home. But the fallout will be a bit bigger than the second lockdown in November.”

The government is offering businesses additional support to try and stave off long-term damage from a third lockdown. On Tuesday, chancellor Rishi Sunak announced £4bn ($5.4bn) in new grants to support retail, hospitality and leisure firms, and another £594m for struggling firms in other sectors. The move is meant to limit job losses and bankruptcies.

READ MORE: Pound under pressure as England enters third national lockdown

A third lockdown may also prompt another rate cut from the Bank of England. The central bank cut the UK interest rate to 0.1% at the start of the pandemic but has so far resisted taking rates into negative territory,

“Markets are now pricing in a 50% chance of an interest rate cut this year, based on the economic damage that will be done by another lockdown,” Laith Khalaf, financial analyst at AJ Bell, said. “That’s up from 30% just a week ago.

“The next Bank of England policy meeting is at the beginning of February, so the MPC members have time to take a deep breath and see how the next few weeks go.”

Bank of England governor Andrew Bailey is set to appear in public later this week.

Watch: What are negative interest rates?