Britain and eurozone face double-dip recovery amid second Covid lockdown

Economists expect economic output to contract sharply in Q4 with the effects milder than the spring shutdown

Shoppers queue to enter an Apple store after new nationwide restrictions were announced during the coronavirus disease (COVID-19) outbreak in London, Britain, November 2, 2020. REUTERS/Toby Melville

Britain and the eurozone now face a double-dip recovery, economists said on Monday, with economies shrinking sharply in the fourth quarter of the year as several European nations endure a second lockdown to combat Covid-19.

The W-shaped recovery, where a recession and subsequent recovery resemble a particular shape on an economic chart, will replace summer expectations of a V-shaped recovery when the number of cases was falling. However, the economic contraction in the last three months of the year will be milder than the spring shutdown, analysts said.

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We now expect a second sharp contraction, albeit significantly milder than the impact of the spring lockdown.

US investment bank Morgan Stanley said it now sees a complex W-shaped recovery, in place of the previous assumption of a V.

“We simply assume a different, more volatile W trajectory, while expecting that fiscal and monetary support will enable another sharp bounce-back once restrictions are lifted,” the bank said.

“With the second wave of Covid-19 cases surging around Europe, driving a sharp rise in hospitalisations, European countries have been reimposing lockdowns, leading us to revise down our 4Q forecast. We now expect a second sharp contraction, albeit significantly milder than the impact of the spring lockdown.”

Prime Minister Boris Johnson unveiled a one-month lockdown for England on Saturday, after regional curbs failed to stem the surge in the number of Covid-19 cases across the UK.

While a second lockdown will hurt some industries more than others, the National Institute of Economic and Social Research said the effect on GDP will not be as severe. This is because schools and universities are remaining open during the lockdown, construction and manufacturing work will be allowed to continue and UK finance minister Rishi Sunak’s furlough scheme has been extended.

“The recovery from the Covid-19 pandemic is threatened by a fast-unfolding second wave, resultant November lockdown and looming Brexit,” said Hande Kucuk from NIESR.

“A second wave and the associated new lockdown are likely to cause a contraction in Q4 and a larger fall in GDP in 2020 of 11 to 12 per cent. The pace of recovery in 2021 and beyond is extremely uncertain and depends critically on Covid-19.”

Business groups said the UK was more prepared this time around, with the GDP bounce back in midsummer offering "a glimpse of what can happen" when the recovery began.

"It shows that we can bounce back again. But we do need to take some really, really hard, fast action now," Dame Carolyn Fairbairn, director-general of the Confederation of British Industry, said at the organisation's annual conference.

"We are better prepared. Thousands of businesses, because of everything you have done, are ready to be open. And one of the things that we are saying to the government, loud and clear, is keep as much of the economy open as we possibly can."

Meanwhile, Wall Street bank Goldman Sachs said European and UK economic growth will be hurt by the closure of non-essential shops, restaurants and bars, with the restrictions potentially rolling over into early 2021.

This would reverse the recovery seen in UK and eurozone economics over the summer following the worst slump ever in April at the height of the first lockdown.

The eurozone economy rebounded more than expected in the third quarter of this year from its Covid-19 slump, with GDP in the 19 countries sharing the euro surging 12.7 per cent in the three months ended September 30, after contracting 11.8 per cent in the previous quarter.

The US investment bank expects the euro area’s gross domestic product to shrink 2.3 per cent in the fourth quarter, a reversal of earlier expectations of 2.2 per cent growth. Meanwhile, it slashed UK GDP forecasts to minus 2.4 per cent from a 3.6 per cent expansion expected earlier.

“Looking ahead, we assume that the new restrictions will last for three months before they are gradually rolled back starting in February,” Goldman Sachs economists wrote in a note to clients.

The Bank of England (BoE) is widely expected to expand its stimulus measures this week with analysts expecting a further $100bn in support.

Analysts at Japanese bank MUFG said the new Covid-19 lockdown could force the BoE into an even larger expansion of its stimulus programme and see it move closer to adopting negative rates well.

The prospect of the UK economy suffering a double-dip recession also weighed on sterling’s fortunes on Monday. The pound fell as low as $1.2852 against the US dollar overnight as traders banked on further BoE stimulus.

“Sterling, in particular, stood out as the worst performer on the first trading day of November, dropping below the $1.29 level, with most parts of the United Kingdom now under some form of lockdown,” said Raffi Boyadjian, senior investment analyst at XM.

In other markets news, travel-related stocks came under pressure following news of the second lockdown, as Irish airline Ryanair reported a €196.5 million loss in the first half of the fiscal year.

“With the government stating that travel is advised against, the declines seen for both national bus travel and international air travel stocks reflect the fact that most journey will have to be cancelled until these restrictions are lifted,” said Ryan Mahoney, senior Market Analyst at IG, a global leader in online trading

“With many suffering from lockdown fatigue, the potential for a less diligent approach in the UK could lead to an extended closure of businesses as they try to get the virus under control in time for Christmas.”

The boss of Britain’s biggest airport group, MAG, also hit out at the government for its “shocking” neglect of the aviation and travel industry.

In a tweet, Charlie Cornish, the chief executive of the group which includes Manchester and London Stansted airports, accused Mr Johnson of “effectively shutting down his business” following the virtual ban on international travel.

MAG is planning to lay off 900 staff and Mr Cornish said urgent government support was now needed to prevent more job losses.

“It is clear they have not understood, or even tried to understand, what the impact of this latest decision will be, let alone put in place measures to help the industry cope with the tough times ahead," he said.

Last week, the Airport Council of Europe said that almost 200 airports across the continent were at risk of going bust this winter.

Meanwhile, UK factory output slowed in October as Covid-19 worries rise, pulling the IHS Markit UK manufacturing PMI down to 53.7 in October, from 54.1 in September.

“October saw the UK manufacturing recovery continue, albeit with the upturn losing momentum amid ongoing lockdown measures and signs that growth could weaken further in coming months after Brexit-related stockpiling," said Rob Dobson, director at IHS Markit.

In the eurozone, manufacturing PMI continued its upward climb, reaching 54.8 in October compared to 53.7 the previous month, with Germany leading the rise.

However, the new lockdown restrictions being imposed in Germany threaten to halt the recovery, with manufacturing optimism falling.

"We've got through the first part of this crisis through sticking together and working together. I say to every leader who is part of these next set of decisions, pull together. We need national unity to defeat this virus," said Dame Fairbairn.

"Secondly, collaboration has to extend across the Channel ... it would be unconscionable to unleash a no-deal Brexit on the countries of Europe, the UK and the European Union as we are facing this vicious second wave."

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