UK: worsening virus trends could threaten the upswing

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●  Second wave: Once again, the COVID-19 pandemic is gathering momentum in the UK. This follows the considerable easing of restrictions throughout the summer. After edging up only gradually during July and August, the number of new daily cases has now surged to the highest level since mid-May. The coming weeks are critical for the economic outlook. We need to assess whether fresh restrictions to bring the virus back under control could derail the upswing.Â

●  Differences from wave one: Comparing recent virus trends to the first wave in spring suggests a much less severe situation at present. Due to the massive increase in testing capacity, the number of confirmed cases as a proportion of actual cases is significantly higher now and includes many more minor and asymptomatic infections. Critically, the number of patients in hospital due to the virus remains at around 5% of the April peak. Hospitalisations have not risen in line with the number of new cases – even considering the roughly two-week lag following new infections. The smaller incidence of complications from the virus seems be partly due to the much higher share of infections among lower-risk young people, while the old and vulnerable are much better shielded than during wave one.

●  The political pressure to act: So far, the UK is trying to contain the breakout with modest national measures such as limiting the number of people in a social group, as well as stricter local measures in virus hotspots. If cases continue to accelerate, however, the government warns that more aggressive measures may be introduced. Having reacted late to the first wave and in the wake of a huge public outcry – the UK suffered the highest death toll in Europe – Prime Minister Boris Johnson could be inclined to adopt a much more risk-averse approach to the second wave.

●  New restrictions pose economic risks: For our base case, we expect the UK to roughly follow the same pattern as the US, which suffered a second spike during the summer months. With luck, a modest increase in containment measures, such as more diligent mask-wearing, enhanced social distancing and possibly reduced hours for restaurants and bars, should flatten the curve. Such measures would slow but not fully stall the ongoing economic recovery.

●  Stepping up the policy response: Reacting to the potential economic fallout from the worsening virus trends, Chancellor Rishi Sunak will, the Financial Times reports, this week announce that the window to apply for the government’s coronavirus business loan support schemes will be extended until the end of November. Mr Sunak has also warned that he could delay the Autumn Budget (due in November) in the event of a major second wave. He would probably instead decide to enhance existing emergency measures. In such an event, we would not be surprised if he extended the employment subsidy scheme instead of ending it on 31 October as currently planned. The growing virus risks also strengthen the case for the Bank of England (BoE) to step up its stimulus. As our base case, we expect the BoE to announce a further £100bn in asset purchases at the November Monetary Policy Report.

●  Clouds gather over the near-term outlook: Uncertainties linked to the pandemic, as well as the difficult ongoing UK-EU trade talks and the threat of a disorderly hard exit from the EU single market on 31 December 2020, point to a challenging year end for the UK. In the worst-case scenario, a second nationwide lockdown, combined with a messy exit from the single market, could tip the UK economy back into recession. We view this as a tail risk, not as our base case.

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

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