The Bank of England has warned that the UK economy is heading towards its deepest recession on record as the impact of the coronavirus has meant the economy would shrink by 14% this year, based on the lockdown being relaxed in June. Scenarios drawn up by the Bank to illustrate the economic impact said Covid-19 was dramatically reducing jobs and incomes in the UK.
Bank of England governor Andrew Bailey has said there would be no quick return to normality and described the downturn as unprecedented and that consumers would likely remain cautious of their own choice even when lockdown restrictions are lifted, suggesting that it wouldn’t be until next summer that activity comes fully back.
On Thursday, policymakers voted unanimously to keep interest rates at a record low of 0.1%. However, the Monetary Policy Committee (MPC) was split on whether to inject more stimulus into the economy as two of its nine members voted to increase the latest round of quantitative easing by £100bn to £300bn.
In its latest Monetary Policy Report, it showed the UK economy plunging into its first recession in more than a decade, as the economy shrinks by 3% in the first quarter of 2020, followed by an unprecedented 25% decline in the three months to June. This would push the UK into a technical recession, defined as two consecutive quarters of economic decline. For the year as a whole, the economy is expected to contract by 14%. This would be the biggest annual decline on record, according to Office for National Statistics (ONS) data dating back to 1949.
And while UK growth is expected to rebound back in 2021 to 15%, the size of the economy is not expected to get back to its pre-virus peak until the middle of next year. However, the economy is expected to recover much more quickly than in past recessions because of the government’s furloughing scheme which should enable people to come back into the economy more quickly than before.
The Bank said the housing market had come to a standstill, while it also highlighted that consumer spending had dropped significantly in recent weeks as shopping on the high street had fallen by 80% and spending on flights, hotels, restaurants and entertainment had stopped. The Bank also stressed that the outlook for the economy was unusually uncertain at present and would depend on how households and businesses responded to the pandemic as many companies are expected to stop or scale back their operations for some time.
While the Bank warns that this is not a typical forecast and that many other scenarios are plausible, these numbers do provide the strongest analysis yet of the current economic effects from the virus and the challenges that lay ahead.
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