UK Covid curbs to wipe 2% off GDP and cost firms £4bn a month

Work-from-home measures saw the pound drop to a 12-month low overnight

Empty seats on a London Underground train, the morning after UK Prime Minister Boris Johnson announced that work-from-home guidance will return in England. PA

Britain’s new Covid-19 restrictions to curb the spread of the Omicron variant could “easily knock” 2 per cent off the country’s economic output at a cost to businesses of £4 billion ($5.28bn) a month.

The government’s Plan B measures in England will see people work from home from Monday, while Covid vaccine passports will be needed for large events, with the Institute of Economic Affairs think tank warning such measures could hamper the economy.

Meanwhile, hospitality leaders accused the government of wrecking the industry with the new curbs potentially wiping 40 per cent off their revenues – the equivalent of £8bn in sales – at the height of the festive season, as companies cancel Christmas parties and events.

“Even without a full national lockdown, the additional Covid restrictions apparently being considered in Whitehall could easily knock 2 per cent off GDP (gross domestic product) – costing the UK economy £4bn a month – and force the taxpayer to stump up billions more to prevent a new wave of bankruptcies and job losses,” said Julian Jessop, economics fellow at the IEA.

“This is on top of all the social costs and harms to people's wellbeing and liberties, as well as the risk of further disruption to children's education.”

The IEA called for “much stronger evidence” that the new variant sweeping the UK is more deadly and not just more infectious before putting in place further measures.

The think tank said the government may have to launch more support schemes to help hard-hit sectors and firms, adding further to the UK debt pile.

While sterling dropped to a one-year low of $1.31615 against the dollar overnight, it recovered slightly to $1.3209 in early morning trading on Thursday.

However, the pound's weakening reflects the likelihood that further restrictions will hold back the wider economy, dampening prospects of a pre-Christmas interest rate hike from the Bank of England even further, even as it expects inflation to exceed 5 per cent next year.

Several UK business groups have called for more government support to protect the economy, with Plan B likely hit spending on retail and hospitality, as offices empty and customers avoid shops.

“Many businesses have only just begun to get back on their feet and this move will inevitably damage business confidence,” Ruby McGregor-Smith, president of the British Chambers of Commerce, said.

“Critically, firms need to know that the government will support them through this next period.”

Meanwhile, UKHospitality chief executive Kate Nicholls said while the government clearly acknowledges that hospitality is safe and can continue to host celebrations ahead of Christmas, the measures will significantly impact consumer confidence.

“They risk devastating the hospitality sector amid its most important time of the year. We therefore desperately need support if we are to survive this latest set of restrictions and urge the government to stand behind our industry,” Ms Nicholls said.

“That means full business rates relief, grants, rent protection and extended VAT reductions. Anything less would prove catastrophic.”

Matthew Fell, chief policy director at the Confederation of British Industry, said fresh restrictions are a setback for the economy and the implementation of Covid certification needs to be “closely monitored”.

“Omicron will quite likely not be the last variant. We need to create consistency in our approach and build confidence by reducing the oscillation between normal life and restrictions,” he said.

“Prioritising daily testing, rather than self-isolation, is a good step. Firms need continued forward guidance and a commitment from government to prioritise ongoing free, mass rapid testing as we learn to live with the virus.”

Despite the threat posed by Omicron, UK shares inched higher on Thursday, amid a clutch of positive earnings reports, but worries about the impact of tougher restrictions in England kept sentiment in check.

The blue-chip FTSE 100 gained 0.1 per cent at 9.17am, with stay-at-home stocks such as sports betting and gaming operator Flutter Entertainment rising 0.5 per cent. However, travel stocks were not so upbeat, with British Airways owner IAG falling 2.83 per cent and EasyJet dropping 2.8 per cent.

“The FTSE 100 continues to tick higher but its momentum has been checked slightly by the reintroduction of restrictions in the UK which suggest the market’s more relaxed attitude to the Omicron variant might be somewhat premature,” AJ Bell investment director Russ Mould.

“The modest gains for the index on Thursday morning could largely be attributed to the weakness in the pound – trading at 12-month lows against the dollar amid concerns around the fate of the UK economy. A drop in sterling flatters the overseas earnings which dominate the FTSE 100.”

However, Rolls-Royce was down 3.76 per cent, despite saying it expects its free cash outflow in fiscal year 2021 to be better than the previous guidance of £2bn due to cost cuts and a recovery in the broader market.

The company, which has more than 400 airline and leasing customers across the world, said it expects to remove more than 8,500 roles by the end of this year, with the pace of the restructuring running ahead of its plan.

“News of tighter UK restrictions understandably overshadowed the latest trading update from aircraft engine maker Rolls-Royce, given its reliance on the aviation sector, with British Airways owner International Consolidated Airlines also under pressure. Hospitality stocks suffered early on too,” Mr Mould added.

Devolved governments in Scotland, Wales and Northern Ireland decide their own Covid-19 restrictions.