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Chief Economist’s note: local lockdown lottery

Chief Economist’s note: local lockdown lottery

Yael Selfin, Chief Economist in the UK discusses the impact of regional lockdowns across the UK.

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Yael Selfin - Chief Economist at KPMG in the UK.

Chief Economist

KPMG in the UK

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Also on home.kpmg

Key points:

  • Third quarter GDP growth could reach 14% thanks to an easing of restrictions.
  • ‘Eat Out to Help Out' and increased demand for staycations delivered a boost to hospitality businesses, especially in areas outside of main city centres. 
  • The impact of local lockdowns varies depending on the nature of restrictions; some areas have seen a drop of up to 30% fall in visits to retail and hospitality businesses.

UK economy reaps the benefits of reopening

Friday’s GDP data for the month of July could show another leap towards recovery, fuelled by the loosening of restrictions. Growth in the third quarter could reach 14% as August benefited from the ‘Eat Out to Help Out’ scheme, which boosted demand for bars and restaurants. Data showed a tripling of the number of seated diners towards the end of August compared to a year ago; the August bank holiday also helped. The scheme had less of an impact on the capital: London restaurant reservations saw a milder 54% rise on last year at their peak.

Likewise, quarantine restrictions on international travel persuaded many holidaymakers to stay in the UK. Traditional UK holiday destinations are seeing a major boost that would offset some of the impact of the earlier lockdown. Data from Google searches shows a sevenfold increase in the number of searches for the term ‘staycation’ between the start of June and mid-July. Meanwhile, Awaze, a UK online holiday cottage operator, saw an 18% increase in prices due to increased demand in August. 

Rising infections have led to localised lockdowns

The strong pick-up in activity over the summer may not continue later this year. An easing of restrictions has come at a cost: the rate of COVID-19 infections is increasing in some areas, leading to localised restrictions. The first of these was in Leicester, which came under lockdown on 29 June. Other cities, particularly in the North of England and in Scotland, have followed.

So far, the nature of restrictions has varied: in Leicester non-essential retail and hospitality had to stay closed; in Aberdeen, pubs and restaurants closed; and in the North of England, fewer businesses have closed and the authorities have limited how households interact, instead. 

Chart 1 : Journeys to retails and recreation locations
chart retail 1

The economic impact of localised lockdowns

In Leicester, the lockdown caused a 30% fall in retail and recreation footfall and spending (Spending data via Centre for Cities, High Streets recovery tracker, 2020). After the initial impact, footfall recovered gradually, in line with the rest of the UK. Chart 1 shows how the level of footfall in retail and recreation locations has evolved since March of this year. In Aberdeen, the chart shows the closing of pubs and restaurants had a similar impact on the local economy.

What is interesting to note is that the localised lockdown in Leicester had a limited spill-over impact on the wider economy. Chart 2 shows how commuters have responded to the announcement of lockdown, with a relatively small 7% reduction compared to the counterfactual that tracks the general UK situation. As this roughly corresponds to the relative size of the affected sectors in Leicester, it suggests that other sectors have not cut back on levels of activity.

Chart 2: Visits to workplaces
chart retail 2

The differences in local restrictions imposed make extrapolating the impacts of the lockdown in Leicester complicated. In Manchester, restrictions focussed on personal mobility, with limited business closures. As a result, they had a limited impact on retail and recreation footfall; the average decline in footfall as per Chart 1 compared to the UK has only been 5% in August.

Clearly, the nature of restrictions determines the scale of the economic impact. It’s important the authorities take a targeted approach to limit the scale of the damage to the local economy. As the number of COVID cases in the UK climbs, further localised restrictions appear inevitable. However, the design of these policies can help minimise the harm to the local economies.

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