The Bank of England has warned that the British economy will suffer a historically deep recession as a result of the coronavirus pandemic that could see it shrink by nearly a third in just half a year
By
PAN PYLAS Associated Press
May 7, 2020, 9:40 AM
4 min read
LONDON -- The Bank of England warned Thursday that the British economy will suffer a historically deep recession as a result of the coronavirus pandemic that could see it shrink by nearly a third in just half a year.
In what it describes as a “plausible” scenario, the bank said the British economy will be 30% smaller at the end of the first half of the year than it was at the start of it, with the second quarter seeing a 25% slump alone following a 3% decline in the first.
Unemployment is projected to more than double to around 9%, but that figure does not include the 6 million workers who have been retained by firms as part of a scheme that sees the government pay up to 80% of salaries, up to 2,500 pounds ($3,075) a month.
The central bank said the economy should start to recover during the second half of the year as the lockdown restrictions start to be lifted and “materially so” in the latter part of the period. It noted that the timeliest indicators of U.K. demand have generally stabilised in recent weeks, albeit at very low levels, after unprecedented falls during late March and early April.
As a result, it anticipates that the economy will end up 2020 with a 14% contraction. That would be far greater than anything seen during the world wars, the Spanish flu of a century ago or the global financial crisis of 2008-9.
Over the longer term, the bank thinks that the British economy could revive quickly if the pandemic comes under control globally. It thinks that the economy could pick up by a record 15% next year and be back to where it was before the outbreak within three years, with the financial sector helping the corporate sector get through the strain.
“We expect the recovery of the economy to happen over time, although much more rapidly than the pull-back from the global financial crisis," said Andrew Bailey, the bank's new governor, who has only been at the helm since March.
“We expect that there will be some longer-term damage to the capacity of the economy, but in the scenario we judge these effects to be relatively small.”
That scenario clearly depends on how long the lockdown restrictions remain in place. The bank has assumed that both the furlough scheme and social distancing guidelines will be phased out between June and the end of the year. It has meanwhile not factored in a second wave of infections.
The gloomy outlook was issued after the bank's Monetary Policy Committee decided to keep its main interest rate at the record low of 0.1% and opted against a further expansion of its bond-buying program. Two of the nine policymakers wanted to increase the bank’s stimulus program by another 100 billion pounds ($124 billion).
The policymaking panel had previously announced big cuts in interest rates, an expansion in its stimulus program and a sizeable lending program as it tries to contain the economic damage of the pandemic.
Bailey said the bank stood ready to support the economy further. Many economists think the bank will back another stimulus package in the next few months, and the reaction in financial markets was relatively positive, with the pound steady at $1.24.
“Having thrown the kitchen sink at the economic recovery, and been unafraid of acting in between meetings, it’s not too surprising that the Bank of England has opted against making any major new changes this week,” said James Smith, developed markets economist at ING. “After all, financial markets are calmer.”
