Bank of England administers a large dose of medicine – but the economy faces a long recovery

Economy & Politics | Latest News

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

The Bank of England is administering a large dose of medicine to the UK’s ailing economy by ramping up bond buying with the aim of lowering borrowing costs to relieve pressure on businesses and households. It’s now clear the UK faces a long road to recovery with the potential of further setbacks along the way. Lockdown mark 2 is forecast to push GDP down by 2% mainly due to a slowdown in social spending which means the economy could be heading for a double dip recession. Although the extension of the furlough scheme will clearly protect jobs, it’s not a magic potion and struggling companies will still have to reduce headcount to survive.

As the unemployment rate is forecast to increase to around 6.3% by the end of the year and to almost 8% early in 2021, consumer demand is likely to take another hit as incomes are squeezed. That will make it even harder for businesses relying on discretionary spending to bounce back.  There is going to be a painful period ahead, as companies are forced to adapt to the change in consumer demand and the shift to online and there could be supply shortages if companies don’t get the investment they need to transform.

To help them through the crisis, since the start of the year companies have raised £80 billlion in net finance, triple the amount raised than usual, with more than two thirds of that from government backed loans. But many need more, and are finding it increasingly tricky to get loans on reasonable terms which is why the bond buying programme, aimed at pushing down borrowing costs should help. The bank’s forecasts for growth are based on the assumption that some kind of deal will be reached in the protracted Brexit negotiations, but even if there is an agreement, leaving the EU will still shave 1% off growth next year.

Already worries about the outcome have weighed heavily on UK asset prices and the bank is also warning that sterling, having made up ground, could depreciate further in the near term. The bank’s latest QE will help relieve some of its patient’s discomfort, but it’s clear the economy will need a lot of rehabilitation and support to fully recover.

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