The UK government announced a four-week delay to the last stage of reopening, due to the spread of the Delta variant of COVID-19. However, this delay to “Freedom Day” is unlikely to prevent the economy from climbing back to its pre-pandemic size by the autumn, in the view of economists at Capital Economics.
COVID-19 probably will not leave a big scar on the size of the economy
“While the restrictions are a big deal for nightclubs, restaurants and pubs, nightclubs add not much more than 0.1% to GDP. And while pubs and restaurants account for 2% of GDP, allowing more people indoors was never going to boost activity by as much as when they reopened outdoors in mid-April and reopened indoors in mid-May.”
“A delay of four weeks would just mean that the boost to activity from the final easing of restrictions comes a month later.”
“It is possible that the Chancellor will provide some offsetting support. It’s been reported that he doesn't want to extend the furlough scheme beyond the end of September. But he could delay making the furlough less generous from 1st July or provide cash grants to firms most affected.”
“The monthly measure of GDP may not rise back to the pre-pandemic peak of February 2020 until August instead of July. And while GDP may rise by 6.0% QoQ in Q2 rather than 6.5% QoQ, quarterly GDP may still return to the pre-pandemic level of Q4 2019 in Q4 2021.”
“As long as the restrictions are eased in the next few months, then there would still be a pretty good chance that COVID-19 won’t significantly reduce the future level or growth rate of GDP. That view is very different to the take of the Bank of England and the Office for Budget Responsibility. It explains why we think the economy can run hotter for longer without generating much inflation.”