How the new Covid restrictions will hit the UK economy

He is not alone in being concerned about the implications of the restrictions being imposed by the prime minister to contain Omicron. Every business owner across England was making a stab last week about the impact of Johnson’s Plan B being imposed just two weeks before Christmas. Reports over the weekend of even deeper restrictions to come will only worsen the worries.

Businesses with office workers were making their own interpretations of Johnson’s recommendation to work from home “if you can” — three words that were being used by some employers as a way to keep offices open, and by others to send staff back home after months of enticing them back following the easing of Covid restrictions in the summer.

Questions are now being asked about whether the behaviours that took hold when Covid-19 first gripped Britain will become more permanent — working from home and shopping online — and what the impact might be on an economy that was already starting to slow. Data on Friday showed that gross domestic product grew only 0.1 per cent in October.

So when the Bank of England’s monetary policy committee meets on Thursday to discuss raising rates from their historic 0.1 per cent low, the decision will be even more finely balanced than last month, when markets were wrong-footed by a decision not to take steps to combat spiralling inflation.

Data in the run-up to that much anticipated decision on Thursday is expected to show the ground has been laid for a rate rise. Unemployment in the three months to October is expected to have remained stable at 4.3 per cent, despite the end of Rishi Sunak’s furlough scheme, while inflation for November is forecast to shoot to 4.8 per cent: more than double the Bank’s 2 per cent target.

That is all before any impact from Plan B. Ruth Gregory, senior UK economist at Capital Economics, saw a risk that Johnson’s measures could result in a contraction in GDP in December, given the sluggish grown in October, and saw scope for further declines should more restrictions be imposed.

“If the pressure on the NHS increases, restrictions might be tightened further, implying substantial downside risks [to GDP] in the first quarter next year too,” she said.

Unlike the lockdowns imposed in March 2020, which brought the economy to a juddering halt and led to the biggest contraction in GDP for 100 years, the latest restrictions are not expected to be so damaging — assuming they go no further.

“Each wave of Covid has brought smaller and smaller effects on the economy,” said Rob Wood, chief UK economist at Bank of America.

Why is that? He points out that England’s restrictions so far are less severe than before — shops and pubs remain open; affected businesses have learnt to adapt with, for example, online deliveries; and the public has become more accustomed to the uncertainty.

The latest curbs have put the focus on consumers — who generate two thirds of GDP — and how they react to Omicron. “It is a not a metaphorical exaggeration to say that when the consumer sneezes, the UK economy catches a cold,” said Simon French, chief economist at Panmure, who is optimistic that the public will hold its nerve.

However, even before Johnson implemented Plan B there were signs that consumers were becoming more cautious. Andrew Goodwin, chief UK economist at Oxford Economics, pointed to a fall in trips on National Rail since Omicron’s discovery, taking journeys back to August’s levels. And restaurant bookings made via Open Table, the reservation service, were down in the week to December 6.

Goodwin did not expect the Plan B restrictions to have a significant impact on economic output, but he is watching for any further responses from consumers. “The direct impact is likely to be small, though the fact that the government has felt it necessary to introduce them may make some even warier of social consumption activities,” he said.

George Buckley, chief UK economist at Nomura, said that while the current restrictions were mild, “rising concerns about the virus could still have a voluntary effect on mobility and output — particularly as people isolate in their attempt to save their Christmas”.

Exactly how many workers will be absent from offices on Monday is not yet clear, but the answer will have implications for pubs such as the Counting House as well as other businesses reliant on city-centre workers — from dry cleaners to sandwich shops.

Paul Swinney, director of policy at the Centre for Cities, said that the next two weeks could determine whether the strides made by employers to get workers back to their desks would be undone in the long term by the new restrictions. “Will employers and employees take heed this time? Will people see it [only] as guidance and keep coming in?”

A snap survey for The Sunday Times by LinkedIn on whether people had been asked to work from home after Johnson’s announcement found a roughly even split. Of the 46 per cent not given the option, 10 per cent said this was despite the fact they could do their jobs at home.

The workplace had in some ways already been divided. A number of firms have already been giving employees a huge amount of flexibility. One banker described how he returned to his desk only once very ten days. Some are embracing a hybid pattern — roughly two days at home and three in the office. Others, particularly traders, have quickly fallen back into their pre-Covid routines.

How people respond to the latest guidance will have a major impact on city centres feeling the brunt of any absence of office workers, particularly London, which has been slower than any other city or major town in footfall returning to pre-Covid levels.

Ian Payne, chairman of Stonegate, Britain’s biggest pub group, said: “Our real concern is London over the next two weeks, because encouraging people to stay at home is going to have a disproportionate impact on the capital versus the rest of the country. We’re seeing it in sales, there’s no question about that.”

He was also gloomy about the new year. “January’s bleak for the industry anyway and I cannot see [restrictions] being lifted. I don’t think anyone believes Omicron is going to decrease in the next three weeks, so we must plan on the basis that these rules are going to be in place in January — which is very bad news.”

Some could fear that restrictions could creep into February and even Easter — and with the end of a range of Rishi Sunak’s emergency Covid-19 schemes looming in March, that means even more problems for business. The measures due to end include relief on business rates for the retail, leisure and hospitality sectors, and a rise in VAT on the hospitality sector back to its pre-pandemic level of 20 per cent from the 12.5 per cent now. It has already risen from its pandemic rate of 5 per cent.

Other pressures building for business include the national living wage, set to increase by 6.6 per cent in April, and national insurance contributions paid by businesses up by 1.25 percentage points.

The British Chambers of Commerce last week called on Sunak to put VAT back to 5 per cent and made more grants available to businesses hurt by Plan B. So far, the chancellor has declined.

Roger Barker, director of policy at the Institute of Directors, questioned the rise in national insurance. “Things have changed — a lot of what the government was planning was predicated on a bounce back in growth,” he said.

That bounce back might not be as strong as first hoped. Oxford Economics has cut its forecast for 2022 from 5.7 per cent to 5 per cent. If Johnson has to resort to another full lockdown next month, James Smith, an economist at ING, calculated GDP in January could fall 5 per cent.

Johnson and Sunak will want to avoid that. But for entrepreneurs such as Helena Hudson, a more immediate issue is getting office workers through her doors. The founder of the Real Eating Company opened her ninth café on Thursday — the day after the Plan B announcement. Takings in the new store in Marble Arch, London, were down 30 per cent on her forecasts, yet branches in Chichester, Portsmouth and Bournemouth were holding up. “It’s a dog’s dinner,” she said.