Three mediating variables of the UK’s second wave restrictions

The dreaded second coronavirus wave is here. The UK’s reproduction rate (R) – the average number of secondary infections produced by a single infected person – has risen to between 1.2 and 15.

On average, this means every ten people infected will infect between 12 and 15 other people – an unacceptable risk to public health.

As a result, on Tuesday Prime Minster Boris Johnson announced a raft of new restrictions designed to stem the R rate and safeguard the UK’s tenuous recovery. These include a pause in the large-scale return of workers to offices, fans to sporting events, and the mandated early closure of pubs, bars and restaurants from 10 pm.

In explaining the necessity of these measures to the public, Mr Johnson said that the “struggle against covid is the single biggest crisis the world has faced in my lifetime”.

While these restrictions do not amount to a full-scale national lockdown, inadequate public compliance or progress will certainly prompt such action. Indeed, Mr Johnson warned that tighter restrictions would be forthcoming if the present measures fail to bring the virus “under control”.

He said yesterday (Wednesday): “If the evidence requires it, we will not hesitate to take further measures that would, I’m afraid, be more costly than the ones we have put into effect now.”

There will be significant, and unequal, economic consequences across sectors and industries. Three variables will mediate the economic fallout: the size and significance of impacted sectors; the longevity of the new restrictions; and whether or not policy support (new or existing) is introduced (or extended).

Undoubtedly the most significant blow will be to the hospitality sector, estimated to contribute between 4–5% of UK GDP, according to the retail and hospitality association, UKHospitality.

And our own Red Flag Alert has found that there are currently 6,000 hospitality businesses in significant distress with 120,000 people employed by those businesses.

The mandated early closing time for bars and restaurants, along with renewed ‘work from home’ guidance for office workers, will reduce foot traffic in central business districts. The depressed demand will prompt businesses capable of pivoting to delivery operations to do so to survive.

The government has forewarned businesses to expect that in the absence of significant progress in reducing the R rate, these measures will remain in force for up to six months.

This time horizon at least provides clarity around which businesses can seek to redefine their business strategy, cash flow forecasts, liquidity access, liability management (including communication with key supply chain partners).

For many SMEs, this could prompt reviews of existing property (and equipment) leases as well as accelerating refinancing requirements. Last week the government extended the moratorium on commercial tenant evictions due to unpaid rents until the end of 2020.

While this provides respite for worst affected sectors, critics have argued it gives cover for well-capitalised companies that choose not to pay rents, effectively tightening a liquidity squeeze on commercial landlords.

The next most significant issue is whether Mr Johnson’s new restrictions will be mitigated by new or extended policy support for businesses, jobs and households.

Chancellor Rishi Sunak is under mounting political and industry pressure to extend the furlough scheme and the Bounce Back Loan Scheme (BBLS) for worst-hit sectors, due to expire at the end of October and start of November respectively.

Sector-specific extensions, it is argued, would soften the impact of the bleak economic winter which the prime minister has forewarned and without which, a spike in unemployment and insolvencies looks increasingly probable.

Last Tuesday, speaking on a webinar hosted by the British Chambers of Commerce, the governor of the Bank of England, Andrew Bailey, added to the chorus, suggesting the government should “stop and rethink” the furlough scheme.

The Coronavirus Job Retention Scheme has so far cost the government almost £40 billion, while the BBLS has cost £38 billion, according to the Treasury.

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