Bank of England forecasts worst UK recession on record
The Bank of England has said that the Covid-19 pandemic will trigger the UK’s deepest known recession.
The economy is projected to shrink 14 per cent this year, the worst annual contraction going back to 1949, according to the Office for National Statistics.
Furthermore, reconstructed data from the Bank of England suggests that such a contraction would be the sharpest since 1706.
The Bank of England’s Monetary Policy Committee has voted unanimously to keep interest rates at 0.1 per cent but was divided over whether to increase quantitative easing into the economy.
The Bank also expects inflation, as measured by the consumer prices index [CPI] to drop to zero at the start of 2021 in line with a plunge in energy prices. The rate of inflation is then forecast to remain below the Bank’s target of two per cent for the next two years.
In the Bank’s analysis, based on the UK lockdown starting to ease over June and social distancing being phased out by September, the second quarter of the year is forecast to bring an unprecedented economic contraction of 25 per cent, triggering a technical recession after a 2.9 per cent decline over the first quarter.
The economy is expected to bounce back with growth of 15 per cent in 2021, but its size is not expected to return to its pre-pandemic peak level until the middle of that year. However, the economy, employment and earnings are all expected to gradually revert to their previous growth rates.
The Bank has said that the economic outlook would depend on how businesses and households respond in the coming months, with its analysis assuming that job losses and reduced incomes will hamper the economic recovery, with many individuals remaining reluctant to leave their homes to shop or socialise and maintaining a voluntary form of social distancing until the middle of next year.
The projections are also based on the assumption that the government’s Job Retention Scheme will be phased out in line with the lockdown, while companies continue to cease or scale back much of their operations.
Considering the shrinkage in wages for employees furloughed under the Job Retention Scheme, annual weekly incomes are expected to fall by two per cent in 2020.
The Bank has also identified that a “pronounced rise in the unemployment rate” is consistent with a large increase in benefit claims. Unemployment is currently at four per cent but is expected to exceed nine per cent over the course of this year.