The Bank of England has said Britain’s economy is recovering more quickly than initially feared from the coronavirus pandemic as consumer spending rises, despite warning of significant risks to jobs and growth.
Leaving interest rates on hold at a record low of 0.1%, Threadneedle Street said Britain’s economy would shrink by a fifth in the first half of this year as a result of lockdown measures imposed in March. Against a backdrop of rapidly rising job losses across the country, it also warned unemployment would double by the end of the year.
However, it said the early signs for the economy as lockdown measures are gradually relaxed were more promising than it had previously anticipated, as consumer spending bounces back close to pre-pandemic levels.
Suggesting the scale of the shock to the economy could be smaller than first feared as activity recovers, the Bank said it expected GDP to fall by 9.5% this year – significantly less than its previous warning for a 14% plunge in output.
Rather than marking the worst economic shock for three centuries, the Bank’s latest estimate for the Covid recession would put Britain on track for the worst downturn since 1921 – when coal strikes, high unemployment and depression following the first world war caused GDP to drop by 9.7%.
After taking emergency action in March to sink interest rates to the lowest level in its 326-year history, the Bank’s nine-member monetary policy committee (MPC) voted unanimously to keep rates on hold at 0.1%. It also voted to keep the central bank’s quantitative easing bond-buying stimulus programme at the same level of £745bn.
In a reflection of the faster economic recovery as lockdown measures are lifted, the Bank said payments data showed household spending in July was less than 10% below its level at the start of the year, and that housing market activity was returning close to normal levels.
Despite the relatively upbeat forecast contained in its quarterly monetary policy report, Threadneedle Street warned Britain’s economy would take until the end of 2021 to regain the level of GDP recorded at the end of 2019. It also warned that serious risks to its assessment still remained due to the continuing health risks from Covid-19 and the chance of a second wave in infections.
Although growth is rapidly recovering, the Bank said it expected the pace of recovery to slow over the coming months. GDP is forecast to rebound by 9% next year – weaker than the 15% growth rate it previously pencilled in.
Andrew Bailey, the Bank’s governor, said: “The outlook for the UK and global economies remains unusually uncertain. It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these.”
More than four months into the pandemic, unemployment in Britain is rising rapidly as businesses come under financial strain from temporary shutdowns and a significant drop-off in consumer demand. In the latest assessment from the Bank, unemployment is expected to reach its highest rate for eight years, at 7.5% – about 2.5 million people – before the end of the year, and remain above pre-pandemic levels until 2023.
The Bank said the government’s furlough wage subsidy scheme had prevented a sharper increase in job losses, estimating that usage of the support package peaked in May with the furloughing of 7m jobs. However, it warned jobs would be lost as the scheme is wound down from the start of this month, sounding the alarm that as many as 1m jobs would still probably be furloughed by the time the scheme is closed at the end of October.
James Smith, the research director at the Resolution Foundation, said the government still needed to take urgent action to protect jobs and to help people who were being made redundant.
“While today’s forecasts from the Bank of England now point to a smaller initial economic hit from the coronavirus crisis than it predicted back in May, they still make troubling reading with the UK expected to see the largest fall in GDP among rich countries,” he said.