Bank of England expects less severe economic slump, but a longer recovery

Bank of England

The Bank of England has said it expects the UK’s economic slump to be less severe than first feared, but it could take longer to bounce back from the coronavirus crisis.

The central bank revealed its latest forecasts as it held interest rates at 0.1% after its nine-strong Monetary Policy Committee (MPC) voted unanimously.

It improved its “indicative projection” for growth in the economy, predicting that GDP will shrink by 9.5% this year, following an unprecedented intervention by the government aimed at safeguarding businesses and jobs from the impact of the COVID-19 crisis.

While that would be the worst performance in 99 years it is less severe than the 14% plunge in the Bank’s May scenario, which would have been the worst in more than three centuries.

However, it also warned it does not expect the economy to return back to pre-coronavirus levels until “the end of 2021”.

It had previously forecast GDP could recover to its pre-pandemic size by the second quarter of 2021.

Bank governor Andrew Bailey told reporters that the economy is “recovering”, but stressed the progress had been “uneven”.

He said: “There are some very hard yards, to borrow a rugby phrase, to come. And frankly, we are ready to act, should that be needed.”

The Bank also issued a revised forecast for unemployment which is expected to peak at 7.5% at the end of this year, almost double the most recent rate but lower than its previous estimate of just under 10%.

However, it pointed out this would still represent “2.5 million people out of work and searching for jobs”, the highest figure since 2013.

As well as holding interest rates, the Bank also said it will maintain its current quantitative easing programme at £745bn.

Rates have already been slashed twice, from 0.75%, since mid-March as part of the Bank’s measures to try and support the economy.

Mr Bailey also said negative interest rates were in the Bank’s “toolbox”, but he had no immediate plans to use the measure for the first time.

He said: “This is the first time the Bank of England has said definitively, yes they’re in the toolbox.

“The toolbox has a few things in it, even though obviously we are inevitably, like other central banks, in a more constrained world given where rates are.”

The Bank had warned taking such a step could hurt its balance sheets and there were “other instruments available”.

The value of the pound picked up against the dollar after traders welcomed the decision to hold rates.

Fiona Cincotta, analyst at Gain Capital, said: “The Bank of England was considerably more upbeat about the recovery than had been expected.

“Upwardly revised growth forecasts, a more rapid recovery than initially feared and no tilting towards negative rates at this time has sent sterling surging towards $1.32.”

Chris Evans, Vice President and UK Country Manager at Intuit QuickBooks said:  “Today’s more optimistic predictions for recovery from the Bank of England are encouraging, with businesses managing to stay afloat and stimulate consumer spending. New figures released by the ONS today suggest business closures were in fact less pronounced in the second quarter of the year, suggesting government loan schemes are being used effectively.

“We have found that digital systems such as e-commerce have been crucial to small business survival, helping them to pivot and keep trading during the most challenging lockdown measures. Our data also indicates that the shift to digital is here to stay; of those who made changes to how their business operates in response to lockdown, four in five expect the changes to be permanent.

“No one could have anticipated this pandemic would accelerate digital adoption by years, but SMBs are already experiencing the benefits that digital can bring. Continued use of digital tools will not only enable SMBs to survive, but also provide a much-needed boost to UK productivity.”