Bank of England warns of worst recession in history

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Bank of England

The Bank of England (BOE) has today issued a stark warning that the UK economy is heading towards its sharpest recession in history.

Due to the continuous impact of the coronavirus outbreak – and subsequent lockdown – this has meant the country’s GDP will shrink by 14% this year (equal to around £300bn), based on the rules being relaxed in June.

The Bank of England has also warned that the UK economy could contract by close to 30% by the end of August.

Today’s data showed a 3% fall in economic output in the first three months of 2020, followed by a further decline of 25% in the second quarter.

The BOE stated that there was a lot of uncertainty on the horizon. A statement read: “The spread of COVID-19 and the measures to contain it are having a significant impact on the United Kingdom and many countries around the world. Activity has fallen sharply since the beginning of the year and unemployment has risen markedly.

“UK households entered this period of economic disruption in a stronger position than they were before the 2008 financial crisis. Policy responses to the virus from the government will provide substantial support to households, but the shrinking economy will put pressure on some households’ finances.”

Industry reaction

Sarah Coles, personal finance analyst, Hargreaves Lansdown

Things are as bad as they seem: we’re living through the deepest economic recession on record. And while bad news about the wider economy is always alarming, right now our everyday lives are likely to be far more affected by the fact that 40% of people have seen their income drop and a quarter are now in some kind of financial trouble.

The government schemes have softened the blow for many people so far, but there’s only so much they can do. Unemployment is expected to jump over the next few months, and remain far higher than before the crisis for a considerable time.

The good news is that we’re already doing the right thing, and where we can, we’re setting aside money so we have an emergency savings buffer in case our circumstances get worse.

And there’s hope on the horizon. The Bank put together a picture of what might happen to the economy, in which a horrific first half of 2020 starts to stabilise towards the end of the year, and improve significantly next year.

Unfortunately there are some pretty big assumptions made in this scenario. And if we’re unwilling to go out and about when restrictions are lifted, or employers are cautious about starting up it could damage the recovery. If Brexit negotiations don’t get on track for a positive deal by 1 January 2021, then things could be worse for longer.”

The Bad News

• The Bank of England says GDP could fall almost 30% in the first half of this year, and 14% over 2020 – the worst fall for 300 years.

• Unemployment is expected to rise to 9% between April and the end of June (It could be 8% overall in 2020, 7% in 2021 and 4% in 2022).

• Average weekly earnings could be down 2% in 2020.

• Inflation is expected to drop below 1%.

• Consumer spending is also expected to have fallen 30% in the first half of the year – and the vast majority of this will not be made up later. It’s expected to be down 14% in 2020 overall.

The Hope

• Government and regulator schemes have helped: 6 million people have been furloughed, and 15-20% of people with mortgages have applied for, or been granted, a payment holiday.

• We’re helping ourselves too. Household savings have increased substantially, and the savings ratio will be 17% this year.

• There’s a chance the recovery could be fairly swift. The Bank of England suggests that in 2021, GDP, consumer spending, and wages could begin their recovery.

However, the path for reopening the economy is assumed to start soon and restrictions are assumed to be largely unwound by the end of September.

The Bank also assumes a comprehensive free trade agreement with the EU is agreed by 1 January 2021. And it accepts there are a number of risks that could make recovery slower, including people still being nervous about going out when the economy is reopened and businesses cautious about rehiring.

It’s also likely to take a while for businesses to get back on their feet, so there could be a rise in the unemployment rate for the long term. It said this had been seen in previous recessions.

Dr. Kerstin Braun, President of Stenn Group, a global trade finance provider, comments on the Bank of England’s decision to hold rates: “The Bank of England has stayed put on interest rates and quantitative easing for now, reserving firepower for the long recovery ahead. We could see more bond buying next month, depending on the extent of the lockdown. Like all central banks, the BOE has no other choice but to try to spend its way out of the crisis, leaving the question of who pays the tab for another day.

“With GDP on track to fall 7% this quarter, and no consensus on when to begin reopening the economy, it is anybody’s guess how long and deep this recession will be. While we don’t know what the new normal will look like, we do know consumer and business life will not be the same as before, even after social distancing measures are eased.”

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