Why a second wave may mean a double dip downturn

Linda J. Dodson

However, the second wave in cases has crucially not led to a large increase in hospitalisations and deaths in Spain with infections being borne largely by the young. That has led Spanish authorities to resist harsher measures and could also help Westminster hold off from reimposing the most economically damaging restrictions if a similar pattern emerges in Britain.

Paul Dales at Capital Economics says this would likely mean the blow “would be much more mild than the catastrophe and collapse in the economy we saw in the first wave”.

“It will probably be a case of the pace of the recovery slowing rather than going into reverse,” he predicts.

“If you look at what happened in the US, there are certainly signs the recovery flattened off but it wasn’t the case that the economy has gone backwards again.”

In the US, a second wave appears to be slowing rather than scuppering the recovery. Businesses responded to surging infections by laying off workers at a faster pace while consumer confidence has also struggled to recover as the virus lingers.

New weekly claims for unemployment benefits are still at close to 1m and continuing jobless claims rose again at the end of August. However, economic indicators have largely been improving in recent months as its economy adapts to life with the virus circulating.

Nonetheless, widespread local lockdowns, renewed restrictions on businesses and more cautious consumers could be enough to create a feared double dip in the UK. Economists at ING warn that tougher restrictions would lead to another fall in GDP in the fourth quarter.

They predict that output would decline even in a scenario where a national lockdown is avoided but restrictions become gradually tighter and uncertainty spikes, hurting the food, hospitality and tourism industries most. 

In that outcome GDP tumbles by an annualised 9.5pc compared to the previous quarter but suffers a 35pc slump if a full national lockdown returns, reversing most of the gains in output seen in the third quarter. 

However, its central case sees the recovery continuing if restrictions are kept local and largely limited to private gatherings rather than businesses.

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