What would be the economic impact of a new ‘circuit break’ lockdown?

The economic impact of two weeks of nationwide restrictions on their own would not be as severe as March’s lockdown says Ben Chu. But a big unknown is what will happen to consumer sentiment

If new nationwide restrictions serve to raise public concerns anywhere close to the levels of March it’s possible the economic hit could be much more severe than first instance estimates suggests (AFP/Getty)

The government seems to be considering acting on the advice of some of its scientific advisors who are proposing a two-week England-wide lockdown – described as a “circuit break” – to coincide with the October school half-term in order to curb the recent rise in the number of identified coronavirus cases.

We’re told that ministers would not order schools to close down again and that this would not be as severe as the lockdown that was belatedly imposed in March when non key workers were instructed not to leave their homes except for food and exercise for around two months. Yet there are suggestions the opening hours of hospitality businesses could be limited to prevent people coming into contact with each other – similar to the recent local lockdown restrictions which currently cover a fifth of the population.

With the UK emerging from the biggest slump in economic activity on modern record it’s natural to be concerned about what the economic impact of all this would be – and the knock-on implications for jobs, incomes and livelihoods.

The Office for National Statistics currently estimates that the UK economy contracted by around a quarter between February and April, during the height of the pandemic, and that it recouped around half of that loss in the following three months as the lockdown restrictions were eased and businesses were permitted allowed to open up again.

There are no official estimates yet for what has happened to economic activity in August and September but survey evidence and real time transactions data from banks points to continued growth.

There is a debate among economists about whether or not we are experiencing a “V-shaped” recovery, meaning activity would be returning as rapidly as it disappeared.  

The truth is we don’t know, but it’s notable that the most recent central forecasts of the Office for Budget Responsibility and the Bank of England suggest the level of UK GDP will not return to where it would otherwise have been for several years.

The official forecasters also expect the headline unemployment rate – which has only risen modestly so far – to spike in the coming months as the government’s jobs subsidy furlough scheme comes to an end in November.

The economic impact of a two-week period of nationwide restrictions in October on top of all this is difficult to judge. It would depend, in the first instance, on the nature of the restrictions imposed.

Keeping schools open would, in theory, make a big difference as education accounts alone accounts for 6 per cent of GDP and many working parents would have to remain at home if the schools closed. This effect alone suggests a new circuit-breaker lockdown would be nothing like as economically damaging as the first lockdown. 

The hospitality and entertainment sectors together account for around 3.5 per cent of the economy. Assuming that the new restrictions are limited to those sectors, the impact should be considerably lower than the original lockdown which shut down huge swathes of retail as well. And, of course, a two-week restriction on trade would not be as damaging as the two-month lockdown that started in March.

Yet there are secondary effects to consider. The question of what happens to consumer confidence if these new restrictions are imposed is critical.  

Some studies, examining places that locked down and those that did not, suggest most people would have stopped travelling, spending and going out, regardless of any state-ordered restrictions, because of their own health concerns.

If new nationwide restrictions serve to raise public concerns anywhere close to the levels of March, it’s possible the economic hit could be much more severe than these initial estimates suggests.

Another relevant factor is the interaction with the winding down of the furlough scheme and support for the self-employed, which has propped up millions of households’ incomes in recent months.

“Attempting these restrictions at the same time as ending the ‘artificial reality’ for household incomes could be much more damaging,” notes Simon French, an economist at the stockbroker Panmure Gordon.  

French stresses the huge uncertainty but thinks that the impact of a two-week set of restrictions in October could be a “small single-digit hit to Q4 GDP growth”.

The Office for Budget Responsibility’s central scenario for the UK economy released over the summer pencilled in 10 per cent UK GDP growth in the final quarter of this year, as the economy bounces back from the slump. Its downside scenario showed 7 per cent growth.

A reasonable guess, then, is that a circuit breaker lockdown could shift the UK economy’s economy down to this downside scenario.

“I don’t think a 3 per cent [of GDP]  hit is a bad starting point but it will obviously depend on what the restrictions are," says James Smith of the Resolution Foundation.

The OBR’s downside scenario has unemployment spiking to 4.3 million, higher than seen in the 1980s. There have, however, been hints from the chancellor that we could soon see new programmes from the Treasury to continue some of the support offered by the furlough scheme when it ends in November. This could defray some of the fallout in the labour market.

Another essential consideration when trying to evaluate the impact of these mooted public health restrictions is the counterfactual: what would happen in their absence? 

If the virus were to proliferate and lead to a major spike in hospitalisations and Covid deaths it’s possible that this, on its own, would shatter consumer confidence and cause greater short-term damage to the economy and livelihoods.

Many would argue that the best support for the UK economy is, in the end, to suppress the virus.