New lockdowns on the Continent are bad news for the British economy

·4-min read
 (Natasha Pszenicki)
(Natasha Pszenicki)

Roughly 20 per cent of Britain’s exports go to Germany, the Netherlands, Belgium and Austria, all of which are experiencing worryingly rapid increases in Covid infection rates. Whether we like it or not, what happens “over there” will have an impact “over here”.

In response to the latest Covid surge, and to the chagrin of local anti-vaxxers, Austria has made vaccinations compulsory. Germany is threatening to do the same. The Netherlands has been one of the first in the current wave to reimpose lockdowns, triggering protests — some involving the burning of bicycles —in both Rotterdam and the Hague. Protests have also occurred in Belgium.

Much has been said over the last few days about Britain’s epidemiological ability to avoid what’s now taking place across the Channel. Having already experienced the Delta variant, we’ve got a bit more “herd immunity”. We’re now offering effective booster jabs to anyone over 40. Vaccine take-up has been better in the UK than in Germany or Austria (although, rather more worryingly, not quite as good as Belgium). Still, we know that Covid has a nasty habit of mutating, particularly when it’s spreading like wildfire, so nothing at this stage should be taken for granted.

Imagine, nevertheless, that we were able to avoid another lockdown even as big chunks of the continent succumb. Would pandemic immunity mean we would also be able to enjoy economic immunity?

Our export exposure suggests not. One way to gauge the danger is to think about the German economy’s ups and downs over the past couple of years. Following its first lockdown in March 2020, Germany’s industrial production fell 31 per cent before bouncing back over the summer months. Following a second lockdown — an initially modest affair in November 2020 but toughened up this January — production went nowhere, flatlining for month after month. The hoped-for economic rebound following this summer’s “grand unlocking” simply didn’t materialise. With global supply chains out of kilter, production shrank again, falling about 4.5 per cent between July and September. All told, German production is still almost 10 per cent lower than it was at the time of Germany’s first Covid death at the beginning of March last year.

Funnily enough, the volume of UK exports has dropped by an almost identical amount over the same period. Both British trade and German production are governed by global demand, by the efficiency with which supply chains operate and by the interconnectedness of neighbouring economies. No longer do German products compete directly with British products for the simple reason that many products now involve contributions from multiple nations. This mutual dependency normally works just fine. It is not such good news, however, if one or more of the participating countries is forced into a production lockdown. Even if the UK remains open for business, export prospects would worsen and consumer items would end up in short supply. For those employed by British companies connected to European supply chains, wages might fall and unemployment rise.

The impact on inflation would not be quite so clear-cut. One of the more remarkable economic developments in recent months has been a pick-up in inflation far more rapid than most of us expected, despite the fact that demand and output are still below where they would have been had the pandemic never materialised.

It would be tempting to think that renewed European lockdowns would dampen demand for British exports and hence push inflation lower. In truth, however, lockdowns are more likely to disrupt productive capacity, leaving shelves emptier and delivery times longer than would otherwise have been the case. Add a sprinkling of Brexit uncertainty and, before you knew it, we’d be looking at a yet more fragmented economic relationship between the UK and its near neighbours. Higher, stickier, inflation would then be a heightened risk.

If the pandemic has taught us anything about our economies, it is the degree to which we have become so dependent on each other. Lockdowns sever the connections that have drawn us closer together over many decades. By doing so, they have revealed vulnerabilities that, for too long, we simply pretended didn’t exist.

Stephen King is HSBC’s Senior Economic Adviser and author of Grave New World

What do you think should be done about the spread of Covid in Europe? Let us know in the comments below.

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