The Bank of England offered hope for today’s economy as it said the coronavirus downturn would be less profound than feared.
The Bank expects the economy to shrink by 9.5 percent in 2020 as a result of the coronavirus pandemic – less than the previous estimate of 14 percent.
That would make it the worst recession since the effects of the Spanish flu and World War I robbed the country in the 1920s, rather than the Great Frost of 1609 as initially thought.
However, the recovery could also slow down as UK plc does not return to the same size as the end of 2019 until at least the end of 2021.
Meanwhile, the unemployment rate could rise from its current level of 3.9 percent to 7.4 percent by the end of the year before slowly declining, according to the latest monetary policy report. That’s less than the 10 percent it previously expected, but about the same as a million people waiting in line.
The rate will still not have returned to pre-Corona virus levels by the end of 2022.
The Bank has decided to keep interest rates low at 0.1 percent and the quantitative easing program – effectively printing money to support the economy – at £ 745 billion.
The bank expects the economy to shrink by 9.5 percent in 2020 during the corona virus pandemic – less than the previous estimate of 14 percent
According to the latest monetary policy report, unemployment could reach 7.4 percent by the end of the year – and there is a lot of uncertainty
The Bank’s latest forecast suggests that the downturn will be the biggest since the early 1920s, when World War I and Spanish flu hit the economy
The report said, ‘UK GDP is expected to be more than 20 percent lower in the second quarter 2020 than in the fourth quarter 2019.
But higher frequency indicators indicate that spending has recovered significantly since declining activity in April. Payment data shows that household consumption in July was less than 10 percent below the level of the beginning of the year.
Activity in the housing market appears to have returned to normal, despite signs of tightening lending for some households.
“There is less evidence available on business spending, but surveys show that second-quarter business investment is likely to have fallen sharply and investment intentions remain very weak.”
In a cautionary note, “The outlook for the UK and the global economy remains unusually uncertain. It will critically depend on the evolution of the pandemic, the measures taken to protect public health and how governments, households and companies respond to these factors. ‘
In May, the MPC said the UK might return to its pre-pandemic magnitude in the second half of next year, but the signs of recovery have been mixed since then.
The latest estimates suggest that inflation could drop to zero this year before rising again.
The Bank has also raised the prospect of negative interest rates again – meaning its commercial customers would effectively pay a fee to keep money safe. Proponents of the idea say it would encourage companies to invest and help recovery rather than staying on reserves.
‘The effectiveness of a negative policy rate partly depends on the structure of the financial system and how the policy is passed on through banks to the interest rates faced by households and companies. It also depends on the financial and economic conditions at the time, “the report said.
“The MPC will continue to assess the appropriateness of a negative policy rate alongside all of its policy instruments.”
James Smith, research director for the Resolution Foundation, said: ‘While the Bank of England’s current forecasts now point to a smaller first economic blow to the coronavirus crisis than predicted in May, they are still struggling to read the UK to see the biggest GDP decline among rich countries.
But with rates that are always low, the Bank cannot do much to support the economy. Instead, the courageous steps needed to help the economy, especially the labor market, will have to come from the government.
The downward scenario of the OBR published last month saw unemployment rise to more than four million next year – a higher rate than in the 1980s
“Urgent action is needed by the Chancellor to support jobs while helping those who are unlucky enough to become unemployed.”
The value of the pound rose against the dollar after traders welcomed the decision to hold interest rates.
Gain Capital analyst Fiona Cincotta said, “The Bank of England was significantly more optimistic about the recovery than expected.
“Upwardly revised growth projections, a faster recovery than initially feared and the lack of negative interest rates at the moment, have raised the pound to $ 1.32.”
Last month, the OBR warned that tax hikes and cuts – potentially equivalent to a whopping 12 pence on the base rate of income tax – are inevitable because it poured cold water in hopes of a ‘V-shaped’ bounceback of the corona virus.
It said GDP is set to fall 14 percent this year, the worst recession in 300 years, with government debt larger than the entire economy.
This underscores the magnitude of the hit and government debt will be £ 710 billion more in 2023-4 than previously expected. That equates to nearly £ 11,000 for every man, woman and child in the UK.
According to estimates, production may not return to last year’s level until late 2024. Taking inflation into account, in 2025 the country will still be 6 percent poorer in the bleakest result.
Meanwhile, unemployment could peak at 13 percent in the first quarter of 2021, representing more than four million people in the queue.
That would be significantly worse than the 1984 unemployment rate of 11.9 percent, and the highest since modern records began in the 1970s. The ‘central’ forecast is that 15 percent of the 9.4 million job losses will be lost.