Circuit breaker lockdown would reset the recovery - Capital Economics
UK Economics

Circuit breaker lockdown would reset the recovery

UK Economics Update
Written by Thomas Pugh
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A “circuit-breaker” lockdown where most pubs and restaurants are closed across the country would throw the economic recovery into reverse and mean that, depending on the severity and length of the restrictions, it could be well into 2023 before GDP regains its pre-crisis level.

  • A “circuit-breaker” lockdown where most pubs and restaurants are closed across the country would throw the economic recovery into reverse and mean that, depending on the severity and length of the restrictions, it could be well into 2023 before GDP regains its pre-crisis level.
  • The surge in the number of COVID-19 cases over the last few weeks to almost 20,000 a day on Wednesday has intensified calls for a two-week “circuit-breaker” lockdown starting in late October. (See Chart 1) Indeed, Liverpool has already been placed into the tier 3 category of “very high” risk, which means that pubs and bars cannot open and people must work at home if they can. And from Friday, London and many other areas will be placed in the “high risk” category, which restricts mixing between different households.
  • We think that the restrictions already in place will mean that GDP doesn’t rise at all in October, November or December. That may result in a 1.3% q/q rise in GDP in Q4 and the economy not getting back to its pre-crisis level until the end of 2022. (GDP would still rise in Q4 as the monthly rises in late Q3 leave the average level of GDP in Q4 higher than the average in Q3.) And in our UK Economic Outlook we warned the risks were heavily weighted to the downside due to the possibility of further lockdowns.
  • The uncertainties surrounding all of this are enormous, but we previously estimated that a two-week lockdown of a similar severity to April’s could reduce GDP by about 5% m/m. (See here.) That’s smaller than the 20% m/m hit in April because it would be half as long, construction and manufacturing businesses would probably carry on working, the government is unlikely to close schools for much longer than the half term holiday and many employees are now better placed to work from home than they were in April.
  • If the government opted to place the whole country under the tier 3 restrictions that Liverpool is under, the impact would probably be half that. Accommodation and food services combined with recreational activities make up around 4.5% of GDP. So a lockdown which stopped all activity in those sectors for two weeks would knock about 2.25% off GDP. Of course, not all activity in those sectors would cease, but activity in other sectors, such as transport, would be hampered too. So we think that extending tier 3 restrictions to the whole of the UK for two weeks could knock off about 2.5% from GDP in that month.
  • If the tier 3 restrictions were eased after two weeks and GDP recovered about 80% of its fall over November and December, then GDP in Q4 would rise by just 0.5% q/q. And if the restrictions remained in place for eight weeks instead of two, then GDP in Q4 could fall by about 1.5% q/q in Q4. The economy may not then return to pre-crisis levels until 2023, a year later than we are currently forecasting. (See Chart 2.)
  • The impact would be much larger if tighter restrictions were imposed on other sectors too. If they were just imposed for two weeks, then we estimate that GDP could fall by about 1.0% q/q in Q4. But if they were in place for eight weeks, then the hit to Q4 GDP could be closer to 4.5% q/q.
  • Overall, any sort of nationwide lockdown would cause GDP growth to shrink again. It would also mean that the government and the Bank of England would have to up their policy support again.

Chart 1: Virus Cases

Chart 2: Illustrative GDP Scenarios (Q4 2019 = 100)

Sources: CEIC, NHS

Sources: Refinitiv, Capital Economics


Thomas Pugh, UK Economist, +44 7568 378 042, thomas.pugh@capitaleconomics.com