Economists say Covid’s restrictions will have a limited impact on the UK’s recovery


The UK’s economic recovery from the coronavirus is expected to withstand the imposition of government restrictions on “Plan B”, but the Bank of England is likely to pull off interest rate hikes, economists said.

With real-time data showing high levels of consumption since Omicron variant was discovered in late November, it seems that households are determined to enjoy the Christmas period even if some sectors, such as the hospitality of the inner city, will be affected by the new rules of work from home.

The latest data from the Office for National Statistics, along with evidence that companies and people have learned to adjust their business to Covid-19 restrictions, has prompted economists to think Omicron’s impact will not be as severe for the UK economy as earlier waves of infection.

Under Measures of plan B, the legal requirement to wear face masks has been expanded, Covid passports or negative side-flow tests have been introduced for major events, and a recommendation to work from home has been made since Monday.

Allan Monks, a British economist at JPMorgan, said working from home was an element of Plan B most important of the measures as it would “prevent the emergence of some forms of consumption”, but said “the economic impact is likely to be small”.

Even a request to avoid the office should not hinder economic growth too much, said Peter Cheese, executive director of the CIPD, an industrial body for human resources professionals.

“Many companies and their people have learned how to work remotely on a large scale and at speed during a pandemic, so they will be in a good position to respond to this change of direction,” Cheese said.

Contrary to Prime Minister Boris Johnson’s view that working Christmas parties should be held even though people should stay away from the office, Cheese added: “We would encourage organizations to follow the spirit of today’s revised guidelines and avoid any personal end to the party year.”

Since many Christmas parties have already been canceled, at the cost of the hospitality sector, lost spending has failed to significantly reduce recent economic activity, suggesting the economy will end the year at its peak.

Official Thursday real-time data from Chaps, the clearing house’s automated payment system, found that credit and debit card purchases in the week ending Dec. 2 were 21 percent higher than pre-pandemic levels and the most since Covid hit the UK.

Line chart of the increase in spending on credit and debit cards in 2021 compared to 2019 (%) showing that Omicron headlines in the last week of real-time data did not spoil consumption

Separate data on debit cards, collected by Fable Data, showed that household consumption recovered strongly in the week ending December 5 and was 10.7 percent higher than in the same week in 2019.

Figures from Bank of America’s own research confirm that the arrival of Omicron seemed to “have little impact on trust”.

Prior to the announcement of Plan B restrictions on Wednesday, Christian Schulz, an economist at Citi, said the measures were “likely to prove much less disruptive than complete closure, which we still think will be avoided”.

Several economists and industry groups expressed a more concerned note in response to the government’s plans, with the Congress of Trade Unions calling for the reintroduction of a holiday scheme for employees and companies affected by work-from-home measures.

In a somewhat unlikely alliance, the Institute for Economic Affairs, a free market research center, warned that Plan B could cost the economy £ 4 billion a month, roughly 2 per cent of gross domestic product.

Julian Jessop, an economist at the institute, said it would “force taxpayers to invest billions more to prevent a new wave of bankruptcies and job losses”.

Most economists believe IEA estimates exaggerate the economic effects, which are far below the 25 percent drop in GDP in April 2020 due to the onset of the pandemic.

Monks at JPMorgan estimated that the hit will be only 0.5 percent of GDP for December and January after a period of economic strengthening in the fall.

Each subsequent wave of Covid-19 caused less damage than the previous one as the population adjusted to health constraints, backed by support measures from government officials.

Monthly graph of the monthly GDP index: 2019 = 100 showing that later waves of coronavirus had a much smaller impact on activity levels than the first

But the risk that Omicron’s wave will be more severe than previous variants, which will require further action later, will likely be enough to convince the BoE not to raise interest rates at next Thursday’s meeting, economists said.

Steffan Ball, a British economist at Goldman Sachs, said he had changed his previous forecast that the BoE would raise rates this month. He believes it would be difficult to explain the increase to the Central Bank’s Monetary Policy Committee immediately after the introduction of the new restrictions.

“We now think that risk management considerations will dominate MPC’s deliberations next week,” Ball said.

“We expect the MOC to signal that this is just a short delay to gather more information about Omicron and indicate that the increase is still appropriate in the coming months.”

Financial markets agree with this estimate, with the probability unlikely that the rate will rise next Thursday and instead be increased from 0.1 percent to 0.25 percent at the next MPC meeting in February.

Martin Beck, chief economic adviser to the EY Item Club, said the investors’ current prediction that the commission will not increase rates in December looks like a “more reliable bet”.


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