Double-Dip Recession Risk Mounts After U.K.’s Rough Weekend 

(Bloomberg) -- The U.K. is on the verge of its second recession in a year with the mutated coronavirus slamming the economy just as Brexit trade talks near their deadline.

The surge in infections, which has blighted the end of 2020, is now likely to have ramifications into 2021 after a weekend in which the government was forced to tighten restrictions even more, and transport links between Britain and the European Union were temporarily halted because of the virus.

The economy is already set to shrink more than 1% this quarter, and the latest pile-on of threats is putting at risk an expected rebound in the first quarter of next year. Bloomberg Economics revised its outlook on Monday to predict another contraction at the start of 2021.

The mounting crisis puts pressure on Chancellor of the Exchequer Rishi Sunak to step up fiscal support yet again, and on the Bank of England to consider whether it needs to boost monetary stimulus.

The new lockdown rules “are likely to extend into the first couple of months of next year,” said Philip Rush, chief economist at research company Heteronomics. “It’s a double-dip recession.”

Two straight quarters of contraction is the standard definition of a technical recession, and last happened at the start of 2020 when the pandemic hit.

The latest hit from the virus comes at an especially unwelcome time, with talks over a post-Brexit trade agreement with the EU still deadlocked. Companies don’t know whether they’ll face tariffs and border checks from Jan. 1.

What Bloomberg Economics Says...

“The first quarter will depend on how quickly any restrictions are eased. We’re skeptical about whether the government will be willing to relax the measures significantly making it highly likely the U.K. economy will contract again.”

--Dan Hanson. Read the full INSIGHT

An extended contraction isn’t a given. While social restrictions look set to remain in pace for a while, the virus-related travel suspensions -- initially for 48 hours -- could be lifted as soon as governments come up with new health protocols.

The U.K. and EU might still reach a post-Brexit trade agreement, and the rollout of vaccines could pull Britain back from the brink.

Read more: U.K. Confronts Threat of Food Crisis as Virus Blocks Trade

As of last week, the BOE, the Office for Budget Responsibility and the majority of economists in Bloomberg survey were expecting growth in the first quarter.

Economists at Berenberg last week cut their prediction for the first quarter to 3% from 5.5% because of new lockdowns. On Monday, chief economist Holger Schmieding said the news over the weekend “adds to the near-term downside risks” but that he expects a “rapid snapback of activity once restrictions can be eased again meaningfully by spring at the latest.”

“We don’t expect a double dip recession, at least not at this stage,” said Sanjay Raja, an economist at Deutsche Bank. “But the probability of one is definitely on the rise.”

Sunak has repeatedly extended the U.K.’s furlough program this year so workers can keep their jobs. Government borrowing is already skyrocketing to the highest ever in peacetime.

Complementing those measures, the BOE has cut its benchmark interest rate to a record low 0.1% and floated the prospect of taking it below zero. It also doubled its bond-purchase program -- the most recent boost was in November.

Tricky Call

Few economists see much room or need for it to do more just yet. Investors brought forward bets on Monday on a rate cut to 0%, though not until November. On quantitative easing, policy makers are already going about as fast as they can, Rush said.

James Rossiter, an economist at TD Securities who used to work at the BOE, said he’s not changing his call yet but it’s possible the bank will have to respond before its next policy meeting in February. Monetary action, if it comes, could be coordinated with the government, something that’s been a hallmark of U.K. stimulus this year.

Rossiter had predicted 0.4% growth in the first three months of 2021. Now he’s not so sure.

“We assumed some form of lockdown through the first quarter, but not this tight, and we didn’t expect this much of a deterioration into the end of the year,” he said. “It’s pretty easy from our perspective to see a double-dip recession.”

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