UK may see renewed economic downturn on new restrictions

London

The UK's new social and economic restrictions to counter a predicted winter Covid-19 infection surge has raised the probability of a renewed economic downturn.

The Bank of England's prediction of a V-shaped recovery are rapidly being changed to a W-shaped one instead, with a down wave in the fourth quarter of this year and hope of upturn from March 2021.

The FTSE 100 index which had rallied from the March low of 4,827 to 6,521 in June, has slipped to 5,831. The index was 7,731 in early January.

The pound, which had rallied from 1.15 against the US dollar in March to almost 1.35 at the end of August, traded at around 1.28 on Tuesday.

"This virus is a fact of our lives, and I must tell the House and the country our fight against it will continue," said Prime Minister Boris Johnson in Parliament on Tuesday. "We need to take decisive and appropriate steps to balance saving lives with protecting jobs and livelihoods."

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Mr Johnson added that the measures could last throughout the six-month winter period.

"It is tempting to hope the threat has faded and seek comfort in the belief you have avoided the virus so far, so are somehow immune - but that type of complacency could be our undoing," he said.

He added that the latest British measures include keeping social groups to a maximum of six and the closure of pubs, restaurants and hospitality venues from 10pm. There must be distanced table service only.

During the summer, he had appealed to workers to return to offices as the economies of central London, Birmingham, Manchester, Edinburgh and other cities had slumped.

The government has since done a U-turn as both Mr Johnson and Cabinet Office Minister Michael Gove have appealed for people to work from home.

Mr Johnson also confirmed that the government has abandoned plans to re-introduce limited numbers of spectators at football matches and other sporting venues and business conferences.

Chris Whitty, the chief medical officer for England, and Patrick Vallance, the UK's chief scientific adviser, have warned that the surge in recent infections posed the threat of 50,000 daily cases and 200 deaths within two months.

Both of them also played down hopes of a Covid-19 vaccine being widely available before the spring of 2021.

The restrictions could have been even worse as some ministers wanted a full lockdown for a fortnight to curb the virus from spreading.

But Chancellor of the Exchequer Rishi Sunak called for less stringent measures to counter economic decline. He intends to extend emergency business loans; and the Bank of England has kept interest rates at only 0.1 per cent and continues with monetary ease, notably quantitative easing (QE).

The new restrictions, however, will have a major impact on pubs and restaurants; and more of these businesses are expected to fold in the coming months. "This is going to be the final nail in the coffin for many," Martin Wolstencroft, who manages several bars across the north of England, told the BBC.

"A hard closing time is bad for business and bad for controlling the virus. We need to allow time for people to disperse over a longer period," said Kate Nicholls, the chief executive of UK Hospitality. "The restrictions are another crushing blow for many businesses across the country".

Paul Dales, the chief economist at Capital Economics, contends that the 10pm curfew and a reversion to working from home implies that the UK economy is unlikely to grow at all in the fourth quarter of this year. Under such circumstances, the economy may not reach its pre-Covid level until at least the second half of 2022, he added.

"Tens of thousands of businesses are hanging on by a thread and likely to run out of cash, meaning that the risk of major job losses when furlough ends is still acute," said Douglas McWilliams, head of the Centre for Economics and Business Research.

"Many people are being kept on, not because of their current productivity but so that they will be available when business picks up. If people start to lose hope in the economy recovering in the foreseeable future, the knock-on effect could well be a multiple of anything that could emerge from an economics calculation."