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Bank of England says economic shock of Covid-19 less severe than expected Bank of England says economic shock of Covid-19 less severe than expected
(about 5 hours later)
Consumer spending rise cheers Bank but unemployment will double and GDP fall significantlyNegative UK interest rates were once unthinkable Consumer spending rise cheers Bank but unemployment will double and GDP fall significantly
The Bank of England has said the economic shock inflicted by the coronavirus pandemic will be less severe than initially feared, despite warnings of a weaker recovery and lasting damage for jobs and growth. The Bank of England has said the economic shock triggered by the coronavirus pandemic will be less than initially feared but the bounce-back will take longer and inflict lasting damage for jobs and growth.
Leaving interest rates on hold at a record low of 0.1%, Threadneedle Street said Britain’s economy would shrink by a fifth in the first half of this year as a result of lockdown measures imposed in March. Against a backdrop of rapidly rising job losses across the country, it also warned unemployment would double by the end of the year, to 2.5 million. Threadneedle Street’s nine-member monetary policy committee (MPC) voted unanimously to keep interest rates on hold at a record low of 0.1% as it warned Britain’s economy would shrink by a fifth in the first half of the year. It also warned unemployment would double to 2.5 million by the end of the year as job losses spiral across the country.
However, it said the early signs for the economy as lockdown measures are gradually relaxed were more promising than it had previously anticipated, as consumer spending bounces back close to pre-pandemic levels. Although suggesting the economy was reaching a turning point, the Bank’s governor, Andrew Bailey, put Britain on notice that it would be ready to cut interest rates below zero to stimulate growth further.
Suggesting the scale of the shock to the economy could be smaller than it had first estimated in May, the Bank said it expected GDP to fall by 9.5% this year – significantly less than its previous warning for a 14% plunge.
Rather than marking the worst economic shock for three centuries, the Bank’s latest estimate for the Covid recession would put Britain on track for the worst downturn since 1921 – when coal strikes, high unemployment and depression following the first world war caused GDP to drop by 9.7%.
Updating its forecasts as lockdown measures are gradually relaxed, the Bank said payments data showed household spending in July was less than 10% below its level at the start of the year, and housing market activity was returning close to normal levels.
Despite the improved outlook the Bank’s governor, Andrew Bailey, warned the British economy still faced significant risks and would take until at least the end of 2021 to return to the same size as before the pandemic struck.
“There’s some very hard yards – to borrow a rugby phrase – to come. And frankly we are ready to act should that be needed. We’ve got huge uncertainty and we’ve got a very big downside risk,” he said.“There’s some very hard yards – to borrow a rugby phrase – to come. And frankly we are ready to act should that be needed. We’ve got huge uncertainty and we’ve got a very big downside risk,” he said.
After taking emergency action in March to sink interest rates to the lowest level in its 326-year history, the Bank’s nine-member monetary policy committee (MPC) voted unanimously to keep rates on hold at 0.1%. It also voted to keep the central bank’s quantitative easing bond-buying stimulus programme at the same level of £745bn. Sounding the alarm as unemployment rapidly mounts and as the continuing risks from coronavirus prevent a return to normality, the Bank said Britain’s economy would take until the end of 2021 to return to its pre-pandemic size. It also warned there would be lasting damage, with GDP still 1.5% below its pre-pandemic trajectory by 2023.
In a sharp change in direction for the Bank, Bailey said interest rates could be plunged into negative territory in the future to stimulate growth – a development that would force commercial banks to pay money to deposit funds at the central bank. However, it said the early signs for the economy as restrictions are gradually relaxed for most of the country were more promising than previously thought, as consumer spending returns close to levels recorded in January.
Other central banks around the world, including the European Central Bank, have used negative rates to discourage saving by businesses and households in order to encourage spending and investment in the economy. The Bank had previously dismissed the use of negative rates under Mark Carney, who Bailey replaced as governor in March. Issuing a less pessimistic update than in May, when it warned GDP could plunge by 14% this year – in what would have been the deepest recession for more than 300 years – the Bank said Britain’s economy was now on track to shrink by 9.5% in 2020.
However, such a decline would still be the worst recession since 1921, when coal strikes, soaring unemployment and depression following the first world war caused GDP to drop by 9.7%.
After taking emergency action in March to sink interest rates to the lowest level in its 326-year history, the MPC left borrowing costs unchanged and maintained the size of its quantitative easing bond-buying programme at £745bn.
However in a sharp change in direction for the Bank, Bailey said rates could be plunged into negative territory to boost growth – a move that would mean high street banks are forced to pay the central bank to deposit funds.
The policy, designed to discourage saving by businesses and households and promote lending to businesses, has been used by other central banks around the world, including the European Central Bank. Threadneedle Street had previously dismissed the use of negative rates under Mark Carney, who Bailey replaced as governor in March.
“I would say this is – I think – the first time the Bank of England has said definitively ‘yes’, they’re in the toolbox. We don’t have a plan to use them at the moment but they are in the toolbox, and I would make that point,” Bailey said.“I would say this is – I think – the first time the Bank of England has said definitively ‘yes’, they’re in the toolbox. We don’t have a plan to use them at the moment but they are in the toolbox, and I would make that point,” Bailey said.
Although striking a relatively upbeat tone in its quarterly monetary policy report, the Bank warned continuing health risks from Covid-19 and the chance of a second wave in infections could knock Britain’s growth trajectory off course. It included a smooth Brexit deal in its estimates, despite little progress towards a deal before the end of the transition period at the end of December. Although striking a relatively upbeat tone in its quarterly monetary policy report, the Bank warned continuing health risks from Covid-19 and the chance of a second wave in infections could knock Britain’s growth trajectory off course. It also included a smooth Brexit deal in its estimates, despite little progress towards an agreement before the transition period for the UK leaving the EU expires at the end of December.
Given continuing physical distancing restrictions, the Bank said it expected the pace of recovery to slow over the coming months, with GDP forecast to rebound by 9% next year – weaker than a 15% growth rate it had previously pencilled in. It also warned the economy would remain as much as 1.5% smaller after three years than it would have otherwise been if the pandemic hadn’t struck. The Bank forecast the unemployment rate would double to 7.5% – about 2.5 million people – before the end of the year, and would remain above pre-pandemic levels until 2023.
Coming against a backdrop of mounting job losses at companies across the country, the Bank forecast the unemployment rate would double to 7.5% – about 2.5 million people – before the end of the year, and would remain above pre-pandemic levels until 2023. It said the government’s furlough scheme had prevented a sharper rise in job losses, with as many as 7m jobs furloughed at the peak of the scheme in May. Although up to 1m jobs are likely to still be furloughed when the scheme closes at the end of October, Bailey said shutting it down was the right thing to do.
It said the government’s furlough scheme had prevented a sharper rise in job losses, with as many as 7m jobs furloughed at the peak of the scheme in May. However, it warned unemployment would rise as the scheme is wound down, sounding the alarm that as many as 1m jobs would still be furloughed by the time it is closed entirely at the end of October. “I don’t think we should be locking the economy down in a state that it pre-existed in,” he said in an interview with the BBC. However, experts warned the rapid increase in unemployment could permanently scar the economy and cause hardship for households across the country.
James Smith, the research director at the Resolution Foundation, said: “While today’s forecasts from the Bank of England now point to a smaller initial economic hit from the coronavirus crisis than it predicted back in May, they still make troubling reading with the UK expected to see the largest fall in GDP among rich countries.”James Smith, the research director at the Resolution Foundation, said: “While today’s forecasts from the Bank of England now point to a smaller initial economic hit from the coronavirus crisis than it predicted back in May, they still make troubling reading with the UK expected to see the largest fall in GDP among rich countries.”