The Bank of England has warned that the U.K. economy could fall into its worst recession on record and could contract as much as 25% in the second quarter as the pandemic and lockdown measures have impacted businesses and workers.
In its latest monetary policy report, the U.K.’s central bank set out a range of scenarios for the economy, based on lockdown measures being gradually eased between June and September.
It suggested that while the economy contracts 2.9% in the first quarter, it could fall 25% in the second quarter, and shrink 14% this year.
That would make it the sharpest fall since 1706, according to Bank of England data.
Unemployment could also rise to 9%—beyond the 8% seen in the previous financial crisis—despite the British government’s job retention scheme covering 80% of wages, the bank said.
Bank of England governor Andrew Bailey is hopeful of a rapid recovery with a forecast that GDP will rebound by 15% in 2021, and that “there is only limited scarring to the economy” thanks to government lifelines.
In early March, the British central bank made an emergency rate cut to 0.25%, before slashing it further to a record low of 0.1% days later, to soften the impact of the coronavirus on the British economy.
The BoE held off expanding its economic stimulus programme but two of the nine member monetary policy committee voted for additional bond buying.
Big number
Consumer spending is expected to plummet by 30% in the three months to June, compared to the last three months of 2019, the bank said.
Crucial comment
Adrian Lowcock of investment platform Willis Owen, said: “The Bank’s latest forecasts are the stuff of nightmares, with the UK tipped to see its economy shrink by 14% this year – a far worse decline than the one seen during the global financial crisis – while unemployment will leap to 9 million.
“The only good news today is that the Bank expects this economic bombshell to be short-lived, and for the economy to bounce back rapidly. However, the MPC itself concedes it is flying blind to a large extent, warning that a pandemic like this is “especially difficult to quantify.”
Key background
The Bank of England has introduced a raft of measures to cushion the British economy against the economic shock of an almost total shutdown of swathes of businesses. In addition to the interest rate cuts, the bank has injected a total of £645 billion ($752 billion) into the economy, mostly used to buy up government bonds. On Thursday, the bank’s governor, Andrew Bailey, said it was ready to provide additional support if needed, but the bank stopped short of agreeing on a further £100 billion ($123 billion) in quantitative easing, despite two members of its Monetary Policy Committee voting for it.
Further reading
Monetary Policy Report press conference (Bank of England)
Monetary Policy Report (Bank of England)
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Source: Bank Of England Warns Of Worst Economic Slump Since 1706
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