LONDON – A Bank of England scenario sees UK GDP falling 14% this year and the jobless rate hitting 8% as the lockdown ravages the economy. The Bank released its first work on the potential impact of the lockdown measures to limit the spread of COVID-19 as its monetary policy committee left interest rates unchanged at their record low level of 0.1%, Sky News reported.
However, two members voted in support of more bond-buying – indicating they felt more support was needed beyond the £645bln of asset purchases, also known as quantitative easing, already targeted by the Bank to boost liquidity. At the same time, it released what it called an “illustrative scenario” based on the assumption of a gradual easing of the UK lockdown that shuttered scores of businesses from March 23.
It said the expectation of a 14% decline in economic growth this year was also dependent on significant support from both the Bank and government with cash currently available from a range of schemes to support businesses, employment and wages. Despite the packages, scores of redundancies have been announced from household names including British Airways, Virgin Atlantic and Debenhams.
Official figures next week are expected to confirm negative growth for the economy for the first three months of the year. The Bank’s projection included a 3% hit between January and March before a 25% decline in GDP in the second quarter. But the Bank saw a rapid recovery from the slump ahead – as the cogs of the economy gradually picked up pace – with GDP expected to surge by 15% next year.
It announced, “The spread of COVID-19 and the measures to contain it are having a significant impact on the United Kingdom and many countries around the world”, adding, “Activity has fallen sharply since the beginning of the year and unemployment has risen markedly.”
It said, “UK households entered this period of economic disruption in a stronger position than they were before the 2008 financial crisis”, adding, “While the policy response will provide substantial support to households, the sharp fall in economic activity will put pressure on some households’ finance.”
“We are vigilant to risks that could emerge once payment holiday measures end, including borrowers seeking to refinance in the coming months,” it noted.
It’s worth emphasizing first off that this is no normal Bank forecast in a few respects. First, it is a scenario – a plausible path for the economy as opposed to the precise path it thinks is most likely. Second, the scale of what the Bank is talking about is nearly completely unprecedented. A fall in economic output of 30% in the first half of the year.
Over the calendar year, the Bank expects the economy to contract by 14%. To put that into perspective, it is the biggest annual fall since 1706. The good news is that the Bank expects the economy to bounce back in the following years, reattaining more or less its pre-crisis levels by the second half of 2021.
But along the way they expect unemployment to rise to close to 10% and business investment to fall sharply. In other words, the Bank does not expect a significant amount of “scarring” in the coming years. Nonetheless, the scale of the scenario’s falls will underline that the economic consequences of the lockdown are unlike anything anyone alive today has ever experienced before.