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UK faces deeper double-dip recession due to Covid mutation

The UK economy is heading for a deeper double-dip recession than previously expected because of the impact of the new coronavirus variant, economists said on Tuesday, as consumers look set to have to hunker down well into the new year.

Although official figures for the fourth quarter have not been published, real-time data and economic forecasts point to a dip in output in the three month period with difficult times now likely to extend well into the first quarter of 2021.

If the government puts more areas into tier 4 restrictions to contain the fast-spreading strain of the virus, the economic hit is likely to be exacerbated. So far only London and parts of south-east England are in the highest tier.

Simon French, chief economist at Panmure Gordon, the investment bank, said: “A double-dip UK recession in the first quarter of 2021 is now more likely than not on the assumption that Christmas mixing and the more transmittable [Covid-19] mutation require new year restrictions for longer.”

The forecasts came after the Office for National Statistics released limited upward revisions to its assessment of UK economic performance this year up to the third quarter.

Between July and September, the UK economy was 8.6 per cent smaller than at the end of 2019, compared with earlier estimates of a 9.7 per cent contraction, the statistics office said.

The outlook deteriorated after September, however, and the second wave was likely to lead to roughly a 2 per cent drop in gross domestic product in the fourth quarter of this year, according to Howard Archer, chief economic adviser to the EY Item Club.

“This would result in record GDP contraction of 10.6 per cent over 2020, allowing for the overall upward revisions to the back data for the first three quarters,” he said.

Although the economy appears set for a deep second dip, the economic data are also indicating that the second downturn is likely to be much shallower than the first and there is significant scope for a strong rebound once inoculations begin to quell the pandemic.

Julian Jessop, economics fellow at the Institute of Economic Affairs, said the evidence so far on the economic response to the second wave was “reassuring” and would not result in a much larger recovery being required.

“It seems plausible that January will look similar to November. GDP could fall by 4 per cent next month relative to December, or £7bn. In normal times this would be a huge number. But in the context of this pandemic, it is relatively small,” he said.

Once a durable recovery was under way, there should be scope for a sharp rebound in household spending, economists added, because household savings was likely to fall back to more normal levels.

ONS figures showed the household savings ratio was still 16.9 per cent in the third quarter of 2020, far above the 8 per cent average of the past two decades.

Ruth Gregory, senior UK economist at consultancy Capital Economics, said that after the first quarter, where a “double-dip recession is a clear possibility”, the third quarter’s high savings rate “provides optimism that as long as vaccines are effective and widespread, GDP will stage a strong rebound in the second half of next year”.

The ONS revised its past data higher on indications the plunge in output in the second quarter was not quite as steep and the rebound slightly stronger in the third quarter. But these did not change the overall picture of the worst recession in well over a century with unemployment kept low solely due to extreme government borrowing and spending to keep companies afloat.

Jonathan Athow, the deputy national statistician for economic statistics, said: “Today’s GDP figures show a broadly unchanged, though slightly stronger picture. Economic output initially fell by around a fifth when the lockdown was imposed in the spring and then recovered around two-thirds of that lost output through the summer.

“Household incomes grew during the summer as many workers returned from furlough. As expenditure also grew, household saving slowed from last quarter’s record level but remains substantially higher than its previous historical peak.”

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Source: Economy - ft.com

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