The Bank of England has warned the British economy could shrink by 14% this year and unemployment more than double by spring as the coronavirus causes the deepest recession in modern history.
Leaving interest rates on hold at a record low of 0.1% as the economic crisis unfolds, the central bank said economic activity across the country had fallen sharply since the onset of the global health emergency and the lockdown measures to contain its spread.
In a warning over the mounting damage to the economy, the Bank said gross domestic product (GDP) could plunge by 25% in the second quarter. For 2020 as a whole, the economy could shrink by 14%, marking the deepest recession for more than three centuries.
Historical Bank estimates for GDP dating back to the 18th century show the economy only shrank more in 1706, by 15%, a year before the treaty of union between England and Scotland and only a dozen years since the Bank’s foundation in 1694.
As Boris Johnson prepares to announce the government’s plan to gradually ease lockdown measures after more than a month of sweeping controls on social and business life, Threadneedle Street said it would take a year for the economy to return to normal and there were heightened risks of long-term damage.
Andrew Bailey, who replaced Mark Carney as the Bank’s governor as the Covid-19 outbreak worsened in March, said the country appeared to be entering the start of the next phase of the nation’s pandemic response.
He said: “The scale of the shock and the measures necessary to protect public health mean a significant loss of economic output has been inevitable in the near term.”
But striking a positive note, he said growth could rapidly recover next year, with Britain bouncing back faster than from the 2008 global financial crisis. The Bank said growth could hit 15% for 2021 as a whole, with GDP recovering its pre-Covid peak by the second half of next year.
However, the scenario assumed no second wave of infections after the easing of lockdown measures over a four-month period from early June.
Bailey said that if a second wave of infections did occur, the Bank would have to respond. “It is our job to meet the needs of the people and we all have our sleeves rolled up to do it.”
Although time is running out for ministers to hold talks with Brussels, the Bank’s latest assessment of the economic outlook also included an orderly transition to a comprehensive EU free trade deal next year.
James Smith, research director at the Resolution Foundation, said: “The Bank’s scenario points to a fairly rapid recovery. But even if this were to materialise – and it is certainly not guaranteed – Britain is likely to be living with a legacy of high unemployment for some years to come.”
Threadneedle Street’s nine-member monetary policy committee (MPC) voted unanimously to keep interest rates on hold at 0.1%, the lowest level in the bank’s 325-year history, after using two emergency cuts in March at the onset of the Covid-19 emergency in Britain.
However, in a reflection of the scale of the economic shock, the rate-setting panel was split over increasing the Bank’s £645bn quantitative easing stimulus package, with two members – Jonathan Haskel and Michael Saunders – voting for an immediate £100bn increase.
Bailey said the Bank stood ready to “take further action as necessary” as the coronavirus pandemic develops.
In its first quarterly monetary policy report since the onset of the pandemic, the central bank said debit and credit card spending data pointed to a 30% plunge in consumer spending, while housing market activity had practically ceased.
In the “plausible illustrative economic scenario” for UK growth and jobs in the report, it said GDP could fall by 25% in the second quarter and unemployment more than double to around 9%.
While the Bank concluded that joblessness would have increased by much more without the government’s coronavirus furlough scheme, such an increase would surpass the damage caused by the financial crisis.
Against the backdrop of plummeting demand for goods and services and steep falls in the global oil price, it said inflation could average just 0.6% this year and 0.5% in 2021 before increasing again. Inflation averaged 1.8% last year, near the Bank’s target rate of 2%, which is set by the government.
As social distancing measures are relaxed it said economic activity should pick up relatively rapidly, although it warned lingering fears over the virus could mean that families and businesses continue to take precautionary measures after lockdown controls are lifted.
Threadneedle Street also undertook a stress test of major high street banks and concluded they could withstand the onset of the deepest recession for at least a century, having improved their resilience since the financial crisis.
Applying pressure on banks to continue lending, it warned failure to lend to businesses would exacerbate the economic collapse and would prove to be self-defeating as banks would face bigger losses as more companies failed.
Bailey said that the message to UK banks that they would be better off lending than not lending had been “well communicated”.
Saying that it expected banks to increase lending by as much as £55bn, aided by government-backed guarantees during the Covid-19 emergency, the Bank added: “It is in the collective interest of the banking system to continue to support businesses and households through this period.”
