LONDON — On the first day of a new national monthlong lockdown in England, it became evident just how much the resurgent coronavirus pandemic had thrown the British economic recovery into reverse. On Thursday, the government and central bank announced an extension of emergency stimulus measures they had introduced in the spring.
The Bank of England downgraded its forecasts for economic growth, saying the recession this year would be deeper and the recovery next year would be slower than it previously predicted.
A few hours later, the chancellor of the Exchequer, Rishi Sunak, scrapped plans to replace the furlough program, in which the government pays 80 percent of the wages for the hours employees cannot work. It was to end on Oct. 31, but it was extended for a month to coincide with the new lockdown. On Thursday, Mr. Sunak said it would be available until the end of March.
“I know that people watching at home will have been frustrated by the changes the government has brought in during the past few weeks,” Mr. Sunak told lawmakers in Parliament on the same day that bars, restaurants and nonessential shops shut their doors to customers a second time. “I have had to make rapid adjustments to our economic plans as the spread of the virus has accelerated.”
The British economy has veered off the path the chancellor had been preparing for as virus cases jumped. In July, Mr. Sunak began rolling back stimulus as the economy reopened. Then, six weeks ago, he outlined a “winter economic plan” designed to support the next phase of the recovery. Employers would be forced to pay a bigger share of their staffers’ salaries to make up for reduced working hours, as a way to limit government support to what he called “viable jobs.”
Since then, the average daily number of new infections has more than tripled, to 22,000, and the government’s decision to impose local lockdowns on virus hot spots failed to constrain the spread fast enough. And so, Mr. Sunak has reverted to the more generous job support program.
He also said on Thursday that companies could rehire people they had laid off recently if they were on the payroll on Sept. 23, and claim wage support for them under the furlough plan.
Some of the uncertainties and U-turns in the government’s response probably could have been avoided, said Jagjit Chadha, the director of the National Institute of Economic and Social Research.
“Nobody is saying we can completely see the future, but it was pretty clear from the scientific analysis that we had in March that there was going to be a first wave and a second wave,” he said.
His organization has been arguing for the government to guarantee income support whenever there are lockdowns or a surge in virus cases that seriously hampers the economy, rather than “time contingent” policies that expire and are ultimately extended. This approach is “a lot more effective than the kind of sequence of stop-go, stop-go that’s been going on since the summer,” he said.
The British economy is now expected to contract 2 percent in the fourth quarter compared with the previous quarter, the central bank said. And the economy won’t return to its pre-pandemic size until early 2022. Three months ago, the Bank of England foresaw a 4 percent increase for the fourth quarter, and a recovery to pre-pandemic levels at the end of next year.
The unemployment rate is also expected to peak at 7.75 percent in 2021, up from 4.5 percent in August. This is only a slight increase from previous projections, because the central bank expects 5.5 million people to be in the furlough program this month, an increase of about three million people.
The extended program is forecast to cost the British government 6.2 billion pounds ($8.1 billion) a month, according to the Resolution Foundation, a think tank that studies living standards.
“Support for firms and workers through a difficult winter is welcome, but it is hard to conclude that the messy process of returning economic policy to full lockdown mode via a two-month, five-stage U-turn is anything other than deeply suboptimal,” said Torsten Bell, the chief executive of the Resolution Foundation.
Central bankers voted unanimously to buy £150 billion more in government bonds, increasing the bank’s total stock to £875 billion. These purchases would begin in January and are expected to last until the end of next year. Officials made more purchases than economists had predicted, and it was the third time the Bank of England has increased bond-buying in 2020. The program is aimed at helping to keep interest rates low, which would make government debt easier to repay over time while encouraging lenders to invest in riskier assets than government bonds.
Prime Minister Boris Johnson has said this lockdown would last only until Dec. 2, but there are expectations, even within his own cabinet, that after this date, England will be under severe restrictions. On Sunday, Michael Gove, a senior cabinet minister, acknowledged that the measures — which require people to stay at home unless they need to leave for work, education or essential shopping — could be extended beyond a month.
“It would be foolish to predict with absolute certainty what will happen in four weeks’ time, when over the course of the last two weeks its rate, its infectiousness, its malignancy have grown,” Mr. Gove said.
In the spring, Britain shuttered businesses and much of its economy later than some of its neighbors, and in the end had a longer lockdown and one of Europe’s worst recessions in the second quarter. Some politicians and economists fear that Britain is repeating this error. Opposition lawmakers had pushed for a shorter nationwide lockdown weeks ago but the government persisted with local restrictions instead.
But the situation in the European Union — Britain’s main trading partner — has also deteriorated. A second wave of the pandemic is “dashing our hopes for a quick rebound,” Valdis Dombrovskis, the European Commission executive vice president, said on Thursday. The commission produced new economic forecasts for the bloc showing the recovery weakening. Meanwhile, a landmark 750 billion euro ($883 billion) stimulus package is stuck in negotiations, and the loans and grants will not be distributed until next year.
The latest stimulus measures cover the period when Britain will separate from the European Union. In line with the government’s official policy, the Bank of England assumes that there will be a free-trade agreement between Britain and the bloc. But its forecasts expect trade disruption to reduce economic growth by one percentage point in the first quarter of 2021, as many businesses still aren’t prepared for a new trading arrangement.