Full blown lockdown would plunge UK economy far below pre-pandemic size

A full blown lockdown would derail the UK’s economic recovery from the Covid-19 crisis, reveals fresh analysis from City economists.

Shutting down the retail, leisure and hospitality sectors will cause the British economy to shrink to six per cent below its pre-pandemic size, according to Pantheon Macroeconomics.

Imposing tougher restrictions on businesses that rely on face-to-face contact, predominantly services firms, would inflict serious damage on the economy due to the industry contributing around 80 per cent of output.

“In a plausible worst-case scenario, in which retail and consumer services businesses are forced to close again, GDP would revert to being about 6 per cent below its January 2020 level while the restrictions were in place,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.

The downbeat assessment comes as the business group, the Confederation of British Industry (CBI), warned the government needs to end working from home guidance as soon as it is safe to do so to prevent unnecessary economic scarring.

Tony Danker, director general of the CBI, said using working from home “as a go-to Covid secure measure brings significant economic cost with it”.

“Some economic activity is displaced to local areas, but it also leaves our town and city centres under real strain for retailers and hospitality. Working from home in practice meaningfully restricts trade for some businesses and impacts mental health too,” he added.

The pessimistic forecast comes as Prime Minister Boris Johnson today refused to rule out further restrictions on economic and social activity being imposed before Christmas to curb the spread of the highly transmissible Omicron variant of coronavirus.

The UK today reported its first death from the new strain.

Last night, Johnson addressed the nation to launch the government’s ramping up of the booster vaccination programme, extending third doses to everyone over the age of 18 in a bid to quash the impact of the Omicron variant of coronavirus.

Tombs’s warning comes as the UK economy is already struggling to squeeze out meaningful growth. The economy grew just 0.1 per cent in October, lower than the consensus 0.4 per cent forecast.

A combination of soaring inflation, supply chain snarl ups and shortages of crucial components used by most sectors of the economy weighed on growth.

A crucial week of economic data is set to add to concerns Britain’s recovery is stalling.

On Wednesday, the Office for National Statistics publishes its latest Inflation estimate. City analysts expect the rate to scale to around five per cent, trending even further above than the Bank of England’s two per cent target after October’s 4.2 per cent reading.

A print that high would add pressure on the Bank of England to act to hose down runaway inflation by hiking rates at its next meeting on Thursday.

Inflationary pressures emanating from the labour could feed into more persistent inflation.

The Bank “faces the risk that high spot inflation feeds into wage settlements to a degree, meaning more persistent high inflation,” analysts at Bank of America said.

However, City experts have reined in bets on Bank hiking rates this month due to uncertainty over how Omicron would impact the economy.

Labour market data is released tomorrow, and a new purchasing managers’ index from IHS Markit is out on Thursday.