Even though we’re facing a truly gloomy November, there is still hope for the economy

We may not know how long the latest lockdown will last, but we have a template to help us gauge what will happen to the economy and plan for it, writes Hamish McRae

Boris Johnson has announced another lockdown in a bid to curb the second wave (Getty)

Here we go again. The new lockdown for England brings back unpleasant memories of the spring – but without the redeeming bonus of brilliant weather. It is a small comfort to note that similar policies are being unrolled across most of Europe, or that the hope is that this one might only last for four weeks. We just don’t know.

We do however have a template to help us gauge what will happen to the economy and plan for it: the experience of the spring. In some ways what will happen in the coming weeks is likely to be worse than before, and in some ways better. But we must also be prepared for surprises.

The bad news first. This lockdown hits a much weaker economy. At the beginning of this year, the economy was still solid, having had a decade of more-or-less uninterrupted growth. Now, we have recovered about two-thirds of the ground lost in the spring, but that is an overall estimate. Some parts are fine, others absolutely not. As a result the finances of most companies, though obviously not all, are much weaker now – as indeed are the personal finances of many of us.

To some extent the damage has been limited by the various government schemes to support both companies and jobs. Such support is continuing, but there will inevitably be gaps through which firms and people will fall.  

The authorities can pull the fiscal and monetary levers but there may not be anything attached at the other end. The job market is in great peril, particularly among the self-employed, which on present plans will suffer because of cuts in the universal credit support system later this month.

More generally, there will be businesses that just about scrambled through the first lockdown, hung on till the summer, but have not managed to rebuild their finances sufficiently to get through this one. The winners from the first lockdown will have another good run, but alas there were many more losers than winners and some won’t make it through. Some jobs are gone forever.

Now the better news. For a start this probably won’t last as long as in the spring, but more importantly, the experience of the spring and summer means that businesses know what they have to do. For example, the hard-hit hospitality industry and its suppliers have been extraordinarily ingenious at finding ways of keeping something going. That ingenuity will be pressed into action again.

Another big improvement will stem from keeping schools open, for quite aside from limiting the mental health damage to children and people who look after them that occurred as a result of the closures in the spring, there is the straight economic benefit to the job market.

A further plus is that some sectors where activity collapsed will probably come through this lockdown better than they did before. The obvious example here is the housing market, which seized up but then had an amazing bounce back, driving house prices up nearly 6 per cent year-on-year, and with the number of new mortgages in September the highest since 2007.

Housing is important not just for the obvious reasons, but also because when people move house they buy stuff to put in the new place. So housing activity has a wider impact on consumer demand, which in turn boosts other bits of the economy. It is also the most important single determinant of most family balance sheets. 

Last week,  Nationwide revealed that the average house price in October was £227,826. That is up from £215,897 in January before the crisis struck. It is quite right to worry about affordability and there is a good argument to be made that the boom in house prices has been socially divisive. But in the short-run higher house prices support consumer spending, and if you are trying to dig an economy out of recession, more consumer spending is the best way to do it. Consumption normally accounts for two-thirds of UK GDP, but collapsed to 62 per cent in the summer.

There is a wider point here. Everyone is feeling battered and with good reason. But the gloom in financial markets, evidenced by the collapse in share prices, contrasts with the boom in the housing market. The professional investors may be scared, but ordinary home buyers are getting on with their lives and are much more upbeat.

All this suggests that the impact of this lockdown will not, on balance, be as serious as that of the spring, and it may be enough to tip the final quarter of the year into a contraction.

If the past nine months have taught us anything it has been that there will be surprises. The obvious negative surprise would be that the vaccines don’t work well enough, so come the spring the world would still have to live with ongoing disruption. The obvious positive surprise would be a huge recovery in consumption and hence growth sustained through next year. But surprises by definition are not predictable. Fingers crossed as we head into a truly gloomy November.