The long-term hit from coronavirus should be smaller than previous recessions despite the massive downturn, the Bank of England governor said today.
Andrew Bailey said although the UK has suffered the worst slump in 300 years due to the pandemic the lasting impact is likely to be less than the 1980s.
And he suggested unemployment will peak at a lower level than the 7.8 per cent the Bank feared last month, after Rishi Sunak moved to extend the huge furlough scheme until September.
In a speech to the Resolution Foundation think-tank, the Governor pointed out that GDP is expected to be 12 per cent lower at the end of March than it was before the crisis started.
But he said the massive government support would help mitigate some of the worst effects, and the population has more transferable skills than in other recessions.
‘If I had to summarise the diagnosis, it’s positive but with large doses of cautionary realism,’ Mr Bailey said, pointing to the ‘huge achievement’ of the UK’s vaccine drive.
Andrew Bailey said although the UK has suffered the worst slump in 300 years due to the pandemic the lasting impact is likely to be less than the 1980s
The OBR forecasts alongside the Budget last week said GDP will not return to pre-pandemic levels until next year, and will still be 3 per per cent below expectations by 2025. Borrowing is also set to stay high
The governor stressed there is a lot of uncertainty about how long the effects of the pandemic will last.
‘We will work more from home than we used to and shop more online because new habits will persist to some degree, and to the extent they unwind it will be over a period of time,’ he said.
But he said: ‘There are reasons to believe that so-called long-term scarring damage to the economy will be lower than in past recessions.’
Mr Bailey said that unprecedented levels of fiscal support would help to limit the amount of scarring, and added that the UK’s labour force was more mobile than in the past, and will find it easier to switch to new jobs.
This is very different to past major shifts, such as during the 1980s when the level of skill involved in a job limited where people could go if their industry was struggling. Many jobs were then also geographically bound in a way they no longer are.
Mr Bailey said that extending the furlough scheme to September, beyond the date when the Covid-19 restrictions on businesses are expected to be lifted, should limit the anticipated sharp increase in unemployment.
However, the Bank has not done its official assessment on unemployment yet since the Budget last week.
Its forecast in February was that unemployment would peak at 7.8 per cent later this year.
‘I would expect we would have a lower profile of unemployment certainly in the near-term, and I probably think it would be lower throughout, but we haven’t done that work yet so I reserve judgment,’ Mr Bailey said.
Speculation has raged throughout the crisis whether Mr Bailey and the rest of his colleagues on the bank’s Monetary Policy Committee (MPC) would decide to slash interest rates to below zero for the first time.
The Bank’s base rate was cut to 0.1 per cent – an historic low – early in the pandemic but the MPC members remain unconvinced that it should be cut to negative.
A negative rate could result in customers being forced to pay to keep their money in a bank account, although those with higher amounts in their accounts, such as companies, are more likely to see the impact.
Mr Bailey pointed to work from the European Central Bank which suggests that negative rates could be a good way to help unlock investment during a recovery, rather than during the crisis itself.
The Office for National Statistics said last month that over the whole of 2020 the economy dived by 9.9 per cent – the worst annual performance since the Great Frost devastated Europe in 1709
Public sector debt is expected to top £2.8trillion in the coming years, according to the OBR
‘They actually used them in the recovery from the euro area crisis, not actually in the crisis. It’s also interesting that no central bank that’s currently using negative rates has made it more negative during the last 12 months, which I don’t think is an accident,’ Mr Bailey said.
He added: ‘They have argued in their research work that particularly because the use of negative rates is concentrated on corporate deposits and wholesale deposits, not retail deposits, that it may have some impact on stimulating investment in a recovery.’
A negative rate is a tool that is useful to have, Mr Bailey said, but how it is used depends on the circumstances at the time.
‘There are probably many reasons why investment has been relatively lower in this country, and if we don’t tackle them now we really are going to make recovery from this crisis difficult,’ he said.