Risk of the virus dealing a second blow to the economy - Capital Economics
UK Economics

Risk of the virus dealing a second blow to the economy

UK Economics Update
Written by Paul Dales
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A surge in new domestic coronavirus cases is the biggest downside risk to our forecast that it will take two years for the economy to return to its pre-crisis peak. It could mean that the recovery takes even longer. And if it coincided with the winter flu season, it could result in a double-dip recession.

  • A surge in new domestic coronavirus cases is the biggest downside risk to our forecast that it will take two years for the economy to return to its pre-crisis peak. It could mean that the recovery takes even longer. And if it coincided with the winter flu season, it could result in a double-dip recession.
  • The renewed surge in coronavirus cases overseas has highlighted the risk that the UK could suffer a similar fate. Admittedly, the number of new cases in the UK has been moving sideways rather than upwards like in the US and Spain. (See Chart 1.) And even the outbreaks within the UK in Leicester, Blackburn and Luton (see Chart 2), which have led to more restrictions in those areas, cover only 1.2% of the population. Our forecasts are already based on an assumption that there are some localised outbreaks and lockdowns. (See here.) But there is a rising risk that they are more widespread and more severe than we have assumed.
  • There are three reasons, though, why the economic consequences of a renewed surge in the virus are unlikely to be anywhere near as bad as the 26% fall in GDP associated with the initial occurrence. First, increases in knowledge, capacity and a better ability to track the virus mean there are fewer concerns that the health system would be overrun. That means another national lockdown would probably be avoided and instead localised lockdowns, like the one in Leicester, would be used to contain the virus.
  • Second, even localised lockdowns are likely to be less severe than the “stay at home” mantra of the national lockdown in March. So some businesses, such as manufacturers and construction firms, would probably still be able to operate. Third, to some degree people are now used to lockdowns, so are better placed to work/spend from home and venture out while adhering to social distancing restrictions.
  • That said, a surge in the virus and more localised lockdowns would, at the least, slow the recovery. The rises in virus cases have resulted in our Covid-19 Mobility Trackers recently stalling in both the US and Spain. (See Chart 3.) And in a worst-case scenario, if a resurgence in the virus occurred when the health system was already under pressure from the normal winter flu season, localised lockdowns may need to be more widespread and severe. At that point, GDP could fall again. The economy would then endure a double-dip recession and the recovery would look more like a “W” than anything like a “V”. (See Chart 4.)

Chart 1: New Virus Cases Per 1,000 People (7-day Ave.)

Chart 2: New Virus Cases Per 1,000 People (Per Week)

Chart 3: CE Covid-19 Mobility Trackers (% vs Feb 2020)

Chart 4: Real GDP (Q4 2019 = 100)

Sources: Refinitiv, CEIC, Google, Apple, Moovit, Capital Economics


Paul Dales, Chief UK Economist, +44 7939 609 818, paul.dales@capitaleconomics.com