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Bank of England: Downturn less severe than feared

The UK economic slump caused by Covid-19 will be less severe than expected, but the recovery will also take longer, the Bank of England has said.

It expects the economy to shrink by 9.5% this year.

While this would be the biggest annual decline in 100 years, it is not as steep as the Bank’s initial estimate of a 14% contraction.

However, the Bank said unemployment was likely to rise “materially” as it held interest rates at 0.1%.

The Bank said the recovery had been “earlier and more rapid” than it had assumed in May, reflecting a faster easing of lockdown restrictions.

Governor Andrew Bailey added: “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.”

The Bank said spending on clothing and household furnishings was now back to pre-Covid levels, while consumers have carried on spending more on food and energy bills than before the lockdown.

However, Mr Bailey cautioned against reading too much into recent data: “We don’t think the recent past is necessarily a good guide to the immediate future,” he said.

The Bank said leisure spending and business investment remained subdued, which would weigh on the recovery.

Slower recovery
The Bank said the UK still faced its sharpest recession on record, with the outlook for growth now “unusually uncertain”.

It expects the UK economy to grow by 9% in 2021, and 3.5% in 2022, with the economy forecast to get back to its pre-Covid size at the end of 2021.

This compares with growth estimates of 15% and 3% respectively, in a scenario the Bank set out in May.

Unemployment is expected to almost double from the current rate of 3.9% to 7.5% at the end of the year as government-funded support schemes come to an end.

Average earnings are also expected to shrink for the first time since the financial crisis.

The Bank said more workers faced a pay cut or freeze in 2020, adding: “In many cases, bonuses have been scaled back or withdrawn altogether for this year”.

Its latest forecasts are based on the assumption that there is no second wave of the virus and that there is a smooth transition to a new EU free trade agreement at the start of 2021.

A fall in energy prices and the temporary VAT cut for hotels, theme parks and other hospitality businesses means the cost of living is expected to barely rise this year.

The Bank expects inflation, as measured by the consumer prices index (CPI), to fall close to zero by the end of 2020, before gradually rising back to its target of 2%.

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