Lockdown 3.0 set to plunge UK back into recession, warn experts

Warnings over a double-dip recession have ramped up as experts predict the economy will plunge between January and March as England is placed in lockdown for the third time.

Experts said gross domestic product (GDP) – a measure of the size of the economy – is now set to fall in both the final quarter of 2020 and first three months of 2021, plunging the UK back into recession, as defined by two successive quarters of falling output.

The economic woes are likely to see pressure mount on the Bank of England to take further action, with speculation swirling once again over the possibility of negative interest rates in the UK.

Economist Allan Monks at JP Morgan is predicting the latest Covid-19 measures will see GDP slump by around 2.5% in the first quarter of 2021.

He said the third lockdown would “hit the economy harder” than in November due to the school closures and tightened measures.

Most experts are already predicting a small fall in GDP in the final quarter of 2020, with the Bank of England last month predicting a 1% decline.

While the drop is far lower than the mammoth GDP fall seen amid last spring’s lockdown, when the economy plummeted by nearly a fifth, it comes as output is still a long way from regaining its poise.

Mr Monks said the economy was “already running 11% below normal heading into this lockdown”.

He said the “path to recovery has been pushed back further” but added there was hope for 2021 as a whole.

“We assume the level of GDP at the end of this year will not be materially lower due to a successful vaccine rollout,” he said.

The extension of the furlough scheme and another £4.6 billion for retail, hospitality and leisure sites will help cushion the blow in the first quarter, but all eyes will also be on the Bank for any further monetary support.

With rates already at the historic low of 0.1%, policymakers are already looking into the possibility of taking them below zero in the UK.

Mr Monks said the Bank – which meets next on February 4 – may not want to do more just yet, after launching another £150 billion of quantitative easing (QE) in November, while negative rates are still being assessed.

On negative rates, he said: “The Bank has given no indication that it is ready to move as quickly as next month on that front, with the result of its review not even published yet and some internal members voicing misgivings about the efficacy of taking rates lower in a downturn.

“If its thinking on this has changed we would expect a clearer indication from internal members on the Monetary Policy Committee in the coming days and weeks.”