Length of lockdown and the implications for GDP - Capital Economics
UK Economics

Length of lockdown and the implications for GDP

UK Economics Update
Written by Ruth Gregory

With the reopening of the economy to be governed by the extent to which the coronavirus is brought under control and the burden being placed upon the NHS, there is still a lot of uncertainty about how long the current restrictions will remain in place and hence the economic damage. In this Update we consider the consequences of different lengths of lockdown on economic activity.

  • With the reopening of the economy to be governed by the extent to which the coronavirus is brought under control and the burden being placed upon the NHS, there is still a lot of uncertainty about how long the current restrictions will remain in place and hence the economic damage. In this Update we consider the consequences of different lengths of lockdown on economic activity.
  • Our central forecast assumes that some restrictions are eased in the coming weeks, but for the most part the severe containment measures remain in place until late June. For the purposes of this Update we call this the “lockdown”. We estimate that GDP falls by 25% peak to trough over March and April (mostly April), stagnates in May and starts to edge up in June. This means that we may see a 25% decline in GDP both in the monthly data as well as in the quarterly figures between Q4 2019 and Q2 2020. (See here.)
  • Leaning off our base case, we have devised various paths for GDP based on different durations of the lockdown. For simplicity, we assume that in each case economic activity stagnates whilst the economy is shuttered and that it follows the same recovery path as our central forecast once the containment measures are relaxed. (See Chart 1.)
  • Table 1 shows the implications for GDP growth. Even at the more benign end of the spectrum in which the current restrictions are lifted immediately and GDP rebounds at the start of May, there is limited comfort. While the 24% q/q fall in GDP in Q2 that we expect in our base case may be reduced to a 15% q/q decline (as highlighted by the dotted circle on Chart 2), economic activity still drops by about 8% in 2020 as a whole. It takes until the end of next year for the economy to return to its pre-recession level. And by the end of 2022, the economy is 3.4% smaller than it would have been if the virus had never existed. (See Table 2.)
  • In a two-month lockdown scenario, the economy gets going a bit quicker than in our base case too. That would mean that the 24% q/q fall in GDP in Q2 in our central forecast would be reduced to a drop of about 20%. (See Chart 2.) (Continued overleaf.)

Chart 1: GDP Lockdown Scenarios (Index 2016 = 100)

Chart 2: GDP Lockdown Scenarios (% q/q)

Sources: Capital Economics

Source: Capital Economics

Table 1: GDP Lockdown Scenarios (% y/y)

Lockdown Scenario

2020

2021

2022

1-Month to end-Apr.

-8.2

7.4

3.1

2-Month to end-May

-10.4

8.6

3.3

Base case: 3-Month to end-Jun.

-12.0

10.0

3.7

4-Month to end-Jul.

-13.5

11.2

4.1

5-Month to end-Aug.

-14.9

12.3

4.6

6-Month to end-Sep.

-16.2

13.3

5.2

12-Month to end-Apr. 2021

-19.6

8.0

13.0

Table 2: Recovery in GDP in Lockdown Scenarios

Lockdown Scenario

Date GDP Returns to Pre-Recession Level

Loss of Output compared to Pre-Crisis Trend (%, Q4 2022)

1-Month to end-Apr.

Dec. 2021

3.4

2-Month to end-May

May 2022

4.4

Base case: 3-Month to end-Jun.

Jun. 2022

4.6

4-Month to end-Jul.

Jul. 2022

4.7

5-Month to end-Aug.

Aug. 2022

4.9

6-Month to end-Sep.

Sep. 2022

5.1

12-Month to end-Apr. 2021

Mar. 2023

6.2

  • Even so, there is still a double-digit fall in GDP of 10.4% over 2020 as a whole, it takes until May 2022 for GDP to return to its pre-recession level and by the end of 2022 the economy is 4.4% smaller than it would have been if the virus had never existed. (See Table 2 again.)
  • At the other end of the spectrum, a 12-month lockdown, in which there are multiple peaks of the virus and stringent measures remain in place until April 2021, shows just how bad things could be. It is possible that GDP could shrink by as much as 20% in 2020 as a whole, remain 6.2% below where it would otherwise have been by the end of 2022 and take until March 2023 to recover to its pre-outbreak level. (See Table 2 again.)
  • In short, these scenarios show that each extra month of lockdown reduces GDP growth in 2020 as a whole by about 1.5 percentage points (ppts). Of course, this is a simplified version of reality. The restrictions are unlikely to be relaxed all at once and there is already evidence that even while the economy is shut down some activity is trickling back.
  • What’s more, the effects on GDP are unlikely to be linear. The longer the restrictions are in place, the longer it may take the economy to recover to pre-recession levels because of scarring effects. Indeed, in the past four recessions it took between three and five years for the economy to return to its pre-crisis level. And compared to its pre-recession trend, after three years the level of output was on average still around 7% lower. (See Chart 3.) That’s bigger than the 6.2% loss in our 12-month scenario. After the past four recessions, the unemployment rate remained elevated for at least four years too. (See Chart 4.) This all suggests that the recovery could be much slower than shown in Table 2 in our 6- and 12-month scenarios.
  • For more information on the possible shapes of the economic recovery after the lockdown ends, see our UK Economics Update “What shape will the coronavirus recovery take?”, 27th April 2020.
  • Overall, these scenarios are a useful guide of the implications for the economy if the lockdown is shorter or longer than our base case of 3 months to late June. If it ends sooner (i.e. a major easing in restrictions across all parts of the economy), then the fall in GDP could be nearer to 8% than 12% in 2020 as a whole. Equally, though, if a lot of restrictions remain in place for a long time then our forecast of a 12% fall in GDP in 2020 as a whole could prove too optimistic.

Chart 3: Recoveries after Previous Recessions

Chart 4: Difference in Unemployment Rate from Starting Level (ppts)

Sources: Refinitiv, Capital Economics

Source: Capital Economics


Ruth Gregory, Senior UK Economist, +44 7747 466 451, ruth.gregory@capitaleconomics.com