News | Published August 07 2020

Bank of England hints at less severe downturn but longer recovery

The Bank of England has said that the economic downturn in the UK brought about by Covid-19 will not be as severe as previously thought but estimates that the recovery will take longer than forecast.

A hastened easing of the lockdown and a sharp increase in consumer spending saw the economy bounce back earlier than expected over May, with spending on clothing and household goods returning to pre-pandemic levels.

The Bank has already held interest rates at 0.1 per cent and has warned of a rise in unemployment. The Bank’s Monetary Policy Committee has indicated that there will be no increase in interest rates until “clear evidence” of a recovery becomes apparent.

The possibility of bringing in negative interest rates to stimulate the economy is being reviewed, in consideration of the possible knock-on effects for lending and prompting consumers to withdraw savings and other funds to hold in cash.

Bank of England governor Andrew Bailey added that spending on food and energy bills also remained above levels seen before the pandemic struck.

Bailey said: "We have had a strong recovery in the last few months. The pace puts the economy ahead of where we thought it would be in May.

However, he added: "We don't think the recent past is necessarily a good guide to the immediate future."

Over the course of the year, the Bank estimates the economy will contract by 9.5 per cent, which would represent the largest annual decline in a century but is not as severe as initial estimates of 14 per cent.

The Bank’s growth projections outline that the economy will increase by nine per cent in 2021 to return to pre-pandemic levels by the end of that year, before growing 3.5 per cent in 2022.

Back in May, the Bank had estimated growth of 15 per cent over 2021 and three per cent in 2022.

Spending on leisure and entertainment remains in the doldrums, with that area accounting for one fifth of all UK consumer spending, while business investment remains weak. Both factors are likely to hamper the economic recovery.

Meanwhile, unemployment is forecast to nearly double, going from 3.9 per cent to 7.5 per cent by the end of the year. The winding down of the government’s furlough scheme in October is earmarked as a significant factor.

Average earnings are also forecast to fall for the first time since the financial crisis of the late 2000s, with the Bank expecting pay cuts or freezes.

It said: "In many cases, bonuses have been scaled back or withdrawn altogether for this year".

The new forecast does not factor in a second wave of Covid-19 cases and presumes that a free-trade agreement between the UK and EU will be in place by the end of 2020.

The cost of living is not expected to rise by any significant margin, in the wake of temporary VAT cuts for hotels, theme parks and hospitality businesses and a reduction in energy prices.

Inflation as calculated by the consumer prices index is expected to be near zero by the end of the year, before rising slowly toward the Bank’s two per cent target.

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Authored by

Alexander Bridge-Wilkinson
Junior Editor
August 07 2020

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