The Bank of England (BoE) is warning that the UK is heading towards its fastest and deepest recession for more than a century, as a result of the impact of the coronavirus pandemic
Scenario modelling used as part of its monetary policy committee (MPC) planning suggested output will fall 3% in the first quarter of 2020 followed by a further 25% in the second.
The Bank says payments data point to a reduction in the level of household consumption of around 30%. Consumer confidence has declined markedly and housing market activity has practically ceased.
Its predictions indicate companies’ sales are expected to be around 45% lower than normal in 2020 Q2 and business investment 50% lower.
Despite widespread take-up of the coronavirus job retention scheme the Bank says sharp increases in benefit claims are consistent with a pronounced rise in the unemployment rate.
The illustrative scenario incorporates a very sharp fall in UK GDP in the first half of 2020 and a substantial increase in unemployment in addition to those workers who are furloughed currently.
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.
It would also be the sharpest annual contraction since 1706, according to reconstructed Bank of England data stretching back to the 18th century.
However, the Bank says given the assumed path for the relaxation of social distancing measures, the fall in GDP should be temporary and activity should pick up relatively rapidly.
Nonetheless, because a degree of precautionary behaviour by households and businesses is assumed to persist, the economy will take some time to recover towards its previous path.
The bank warns that the outlook is ‘unusually uncertain’, but the MPC does not favour injecting more stimulus into the economy and voted unanimously to keep interest rates at a record low of 0.1%.
Prime Minister Boris Johnson is to review the coronavirus lockdown in England today, as this marks the end of the second three week period of restrictions.
Johnson has already indicated it is likely some rules could be eased from Monday 11 May, and is set to address the nation on Sunday outlining plans for the next stage which will involve restarting the economy. This will include encouraging some people to go back to work.