The dreaded second surge has already arrived, and with that a second national lockdown in England and more measures to come in Wales, Scotland, and Northern Ireland. Any hopes of a steady economic recovery have disappeared, with most analysts pointing to a deep and protracted recession (thanks to the combination of a severe supply-side and demand-side shock). This has prompted emergency action both from the Treasury and the Bank of England in order to encourage consumer spending and keep unemployment low.

As government restrictions have forced the closure of the leisure, hospitality and retail sectors, this renewed lockdown marks the start of a bleak winter – especially for businesses that were already struggling. Revenues remain significantly below pre-pandemic levels, owing to a combination of various factors: restrictions on capacity and footfall (as measures to prevent virus spread), decreased consumer spending due to lower household income, the threat of unemployment, and general unease over future uncertainty. Profits have also been dampened by costs associated with an accelerated switch towards online purchasing. The timing of this lockdown could further compound its consequences, as these sectors (particularly retail) are highly dependent on sales generated during the busy pre-Christmas season. Helen Dickinson, chief executive of the British Retail Consortium, said the spring lockdown had cost non-essential retailers £1.6 billion a week in lost revenue, but that the new closure would cause “untold damage”, since in the run-up to Christmas “these losses are certain to be much bigger”.

Small businesses, in particular, are extremely vulnerable to such a fall in their cash flow. With debt accumulated from the first lockdown, many firms are in a much weaker position now than at the start of the pandemic, lacking the financial resources to survive extended closures or restrictions on demand. Moreover, according to recent research by the Bank of England (BoE), they are more likely to operate in the worst affected sectors, and typically have fewer external financing options available to them than large corporations. In fact, the BoE’s models forecast that, even with additional fiscal stimulus from the Treasury, “small to medium-sized enterprises” face an aggregate cash-flow deficit of around £40-70 billion this year, with the BoE predicting an “uncertain” outlook and an “increase in insolvencies ahead.” This bodes ill for the future: small businesses make a large contribution to the British economy, compromising 45% of total revenues and around 60% of private sector employment.

With many businesses suffering from less access to capital and fewer sales, it is indeed inevitable that many will turn to aggressive cost-cutting to stay afloat. Workers will suffer: past experiences of recessions always show spikes in unemployment during economic contractions. Combined with a poorly performing economy, rising unemployment will most likely lead to a further decline in consumer confidence, as households restrict or defer non-essential spending. Even more economic output leaks away as personal saving increases, as both consumers and investors will retain cash due to uncertain future prospects.

Despite strong resistance from the Treasury for months, a fresh round of fiscal stimulus has been confirmed by Chancellor Rishi Sunak, restarting the UK’s furlough scheme just days after its end by subsidising 80% of wages for any hours that employees do not work. He also announced new grants for businesses that are required to close by new lockdown measures, providing a further £1.1bn for local authorities to offer one-off support to businesses, and extending mortgage holidays that had been set to expire in November until March next year. This time, however, there will be no further help for the self-employed (estimated to be around five million people in the UK) or for renters. Additionally, tax reductions have been implemented in the form of a business rates relief, deferral of income tax, and a temporary reduced tax rate of 5% for the hospitality and tourism sector.

Regarding monetary policy, economists expect an upcoming announcement from the Monetary Policy Committee of the BoE to reinforce economic support from the government. Interest rates (which when cut discourage saving and encourage investment by lowering the cost of borrowing) have already been cut to a record low of 0.1%. Even though negative rates have been explored by other central banks (such as the European Central Bank) this is an unusual scenario where savers pay for the privilege of saving. In such extraordinary times the next instrument of monetary policy is usually quantitative easing (QE), which has already been employed in this crisis. With QE, the central bank purchases bonds from the market in exchange for cash; specifically, in the UK, the Bank of England creates more money and uses it to predominately buy UK Treasury Bonds (government debt) on the open market, and in this indirect way also stimulating aggregate demand by  adding liquidity to the market. A further £150 billion has been added to the BoE’s target stock of asset purchases, despite economists arguing that this would do very little to boost growth at present because there is little scope to reduce borrowing costs further.

Even though these promised injections will help to ease the pain, it seems that Britain’s economic outlook remains bleak. While SARS-CoV-2 continues to spread and the economy slides into paralysis, the tools for restarting an economic recovery are running out. The BoE is in a liquidity trap where interest rates cannot be easily further lowered, while the Treasury is facing pressure to control its ballooning budget deficit. Misjudged optimism, increased social mixing, and a rush from policy-makers to rapidly boost spending have all contributed to another rise in infection rates and deaths, which have forced the hand of policy-makers to enforce restrictions that will worsen our current economic turmoil. Hope remains, however, that this second wave will not lead to the deep shock we saw in spring, as firms have switched to being at least partially online and lessons have been learnt from the first wave. Like so many aspects of the pandemic, however, only one thing remains certain: uncertain times lie ahead.