UK: Lockdown 2.0 – implications an d outlook

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●  England lockdown: Reacting to the continued surge in new SARS-COV2 infections, UK Prime Minister Boris Johnson announced on Saturday that England would go into lockdown for 27 days from 00:01 GMT on Thursday 5 November. The new restrictions are similar to those imposed in France. While schools and universities will remain open this time around, restaurants, pubs, non-essential store retail, leisure and entertainment will once again be forced to shut. The government aims to begin lifting the measures from 2 December, but warns they could last longer. When the lockdown is eventually lifted, England will return to a tiered system of restrictions determined by local virus trends.

●  Quick vote: Parliament will debate and vote on the proposed measures on Tuesday. While some backbench Conservative MPs could rebel and vote against the new measures, they seem to have broad-based support among the ranks of opposition Labour MPs. Despite some noise, parliament is likely to pass the measures with little serious fuss.  Â

●  Double-dip: Activity in the directly affected parts of the economy such as retail, restaurants and bars, real estate, leisure and travel will tank during November. These sectors account for around 16% of UK GDP. Less affected sectors will still feel a pinch as the big confidence shock hurts domestic demand. Just like the first lockdown, the restrictions will throttle demand and supply. The economy will contract for the second time this year. As a rough guess, we expect November GDP to shrink by 12% from its still soft September level.

●  Forecast downgrades: We now project a 5.5% qoq drop in Q4 2020, versus a de facto stagnation two weeks ago when we had anticipated harsh restrictions over the winter but no full lockdown – see chart. But in a similar pattern to summer, activity will likely snap back sharply once the measures are eased. We now expect a gain of 5.0% qoq in Q1 2021, up from 2.1% previously with faster quarterly gains for the rest of the year. On an annual basis, this results in an 11.8% contraction in 2020 followed by a 6.4% gain in 2021 and 3.9% in 2022. The Eurozone, where restrictions in some countries such as Germany are less harsh, will be affected a bit less than the UK. We expect the Eurozone economy to contract by 3% in Q4, with annual changes in GDP of -7.4% in 2020 and +5.0% in 2021. See Forecasts at a Glance.Â

●  Not quite like spring? The second lockdown comes as less of a shock than the first. Households and companies know what to expect and the government already has aggressive measures in place to support jobs, cash flow and credit. Demand from China and the US seems much stronger than in spring. However, the second shock comes as the economy has only partly recovered from the historic recession in spring. The double body blow raises the risk of serious scaring to companies and to labour markets that could harm long-term growth potential somewhat.Â

●  Major policy response: Johnson has already announced that the government will extend the furlough scheme by one month until 1 December (and at the original 80% wage subsidy). We expect Chancellor Rishi Sunak to announce further support measures this week. They may come on Wednesday after parliament has passed the legislation for the second lockdown or alongside the Bank of England’s (BoE) November Monetary Policy Report on Thursday. As our base case, we look for the BoE to announce an additional £100bn in asset purchases. However, policymakers may decide to go further by expanding existing credit support policies or by directly intervening into money markets in case of a serious panic.

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

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This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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