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Breakingviews - UK gives dark glimpse of pandemic’s next act

People queue at the coronavirus disease (COVID-19) testing centre in Liverpool, Britain November 6, 2020.

LONDON (Reuters Breakingviews) - Britain is giving a worrying glimpse of where the pandemic could go next. A more contagious variant of Covid-19 spreading through the south-east of England prompted major European Union states, Canada and India to suspend air links with the United Kingdom on Monday, while France has halted road freight for 48 hours. The next act has a local and a global component.

Despite the initial shock of Britain’s not-so-splendid isolation, the new strain could have some helpful domestic effects. The UK is now spared a five-day period over Christmas that could have exacerbated an already dangerous viral spread. It also acts as a handy stress test of how prepared Britons really are for tangible shortages of goods.

Every day 5,000 trucks enter Britain from the continent via the Dover-Calais crossing. In the winter, they carry nearly all Britain’s fresh fruit and vegetables. Retailer J Sainsbury predicted shortages of items like lettuce, broccoli and cauliflower within days. If they happen, Prime Minister Boris Johnson may see the logic of agreeing a post-Brexit trade deal before his Dec. 31 deadline.

There are two big problems, though. A harder and longer UK lockdown will hold down a domestic economy that is one of the worst hit globally in 2020. The Office for Budget Responsibility’s central forecast already reckons Britain will see peak unemployment of 7.5%, a 4% budget deficit by 2025 and debt at 105% of GDP. Its downside prediction assumes 11%, 6% and 123% respectively. The valuations of firms like British Airways and easyJet are supported by expectations that things will gradually improve next year. Both dropped around 10%, while UK shopping mall operator Hammerson lost 12%.

The other issue is global. There is no hard evidence that the new viral variant can sidestep new Covid-19 vaccines, and intra-EU border closures occurred in the early stages of the pandemic. But the speed of closures this time betrays fears that a new variant may not stay in Britain – a new strain is driving a surge of cases in South Africa, for example. While the UK’s FTSE 100 stock index lost 2.5% on Monday, France’s CAC 40 shed 3.5%. The true risk of Britain’s latest virus shock is that it proves not to be the only one taking the red ink to 2021 growth assumptions.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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