Bank of England says impact of lockdown is NOT as bad as last spring and huge vaccine rollout should mean fast bounceback – but economy will still shrink 4% in first quarter
- Bank of England has issues its updated forecasts for how UK’s economy will fare
- Downgraded the estimates for this year with a 4 per cent dip due in first quarter
- means GDP 12 per cent lower than pre-Covid but latest lockdown less damaging
The Bank of England slashed its growth forecast for this year today but voiced hope that the rapid vaccine rollout will spark a strong recovery after June.
In its latest Monetary Policy Committee report, the Bank reduced its estimate for economic growth for 2021 from 7.25 per cent to 5 per cent.
It said an expected 4 per cent dip in this quarter will leave the economy an eye-watering 12 per cent smaller than at the end of 2019.
However, that would avoid a double-dip recession – which would have required two successive quarters of contraction – and the MPC suggested that the impact from the latest draconian lockdown is not as bad as last spring.
Governor Andrew Bailey pointed to the prospect of a surge in consumer spending from people splashing out with money saved on travel during the squeeze, amid evidence of strong holiday bookings for later in the year.
And the Bank increased its forecasts for next year from 6.25 per cent to 7.25 per cent – while stressing that the mutant strains circulating meant the situation is highly uncertain.
In a keenly awaited signal, the MPC poured cold water on the short-term prospects for negative interest rates – seen by some as a way of stopping businesses sitting on capital.
Mr Bailey said: ‘The MPC’s central forecast assumes that Covid-related restrictions and people’s health concerns weigh on activity in the near term, but that the vaccination programme leads to those easing, such that GDP is projected to recover strongly from the second quarter of 2021, towards pre-Covid levels.’
He said the progress of the programme was ‘very good news’.
‘I want to congratulate and pay tribute to everybody who’s involved – it’s a great story and it is reflected in our forecast,’ he said.
The committee held rates at 0.1 per cent and kept its massive pile of quantitative easing – effectively new money pumped into the economy – steady at £895billion.
In its latest Monetary Policy Committee report, the Bank reduced its estimate for economic growth from 7.25 per cent to 5 per cent for this year
The MPC suggested that the impact from the latest draconian lockdown does not seem as bad as from the first one last spring
The Bank’s report said that the downturn in 2020 had been marginally less than feared at the last review in November.
It now believed the economy expanded by 0.6 per cent at the end of 2020 as the UK proved surprisingly resilient in the November lockdown.
Unemployment will peak at 7.8 per cent after the furlough scheme ends, according to the Bank.
But it is forecasting that as restrictions ease, household spending will surge with Britons splashing out 5 per cent of their savings built up during lockdowns.
It said there was evidence from business sectors that vaccine news had already seen UK holiday bookings jump for later in 2021, though caution remains over overseas trips.
‘The Covid vaccination programme would be expected to lead to an easing of social distancing restrictions, reduced economic uncertainty, and higher activity, although the timing of those effects is hard to predict,’ the Bank said.
Howard Archer, at the EY Item Club, said the Bank kept rates on hold as it ‘chose to look to the brighter longer-term prospects for the economy which will stem from the progressive rollout of the Covid-19 vaccines’.
The MPC report said: ‘UK GDP (gross domestic product) is expected to have risen a little in 2020 Q4 (the fourth quarter of 2020) to a level around 8 per cent lower than in 2019 Q4.
‘This is materially stronger than expected in the November report.
While the scale and breadth of the Covid restrictions in place at present mean that they are expected to affect activity more than those in 2020 Q4, their impact is not expected to be as severe as in 2020 Q2, during the United Kingdom’s first lockdown.
‘GDP is expected to fall by around 4 per cent in 2021 Q1, in contrast to expectations of a rise in the November report.’
The report said the ‘Government’s employment support schemes are likely to limit significantly the immediate rise in unemployment’.
But it added: ‘A further increase in unemployment is projected over the next few quarters.’
‘GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns.
‘Projected activity is also supported by the substantial fiscal and monetary policy actions already announced.’
Bank of England governor Andrew Bailey has been overseeing its response to coronavirus
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