Bank of England warns of ‘scarring’ to the UK economy
Bank of England policymakers have stressed that the UK economy faces big risks in the coming months, saying that the “scarring” could be worse than they predicted in August.
Speaking to the Treasury Committee of MPs, governor Andrew Bailey said the Bank’s latest forecasts were highly uncertain. He said it was unclear the extent to which “natural caution” would prevent people from going back to their normal lives and “reengaging” with the economy.
In August, the Bank predicted the UK economy would shrink by 9.5 per cent this year and grow nine per cent the next.
Bailey said the Bank had thought British GDP would be about 1.5 per cent smaller in the long run, due to coronavirus, than it otherwise would have been. But he stressed that there were big risks to that forecast.
Deputy governor Dave Ramsden told the committee that he was worried the economy would do worse.
“The risks are more that unless the adjustment is very quick and happens quite easily, that the chances are that the scarring effects over time may be larger than that,” he said.
The UK economy shrank 20.4 per cent in the second quarter in the worst performance in Europe. However, growth has returned relatively rapidly as coronavirus restrictions have been lifted.
Bailey told MPs that household spending was now very close to pre-pandemic levels. He also said mortgage approval figures have rebounded strongly.
UK economy’s rebound uneven
Yet the governor said the rebound has been uneven. He pointed to credit card data that showed London had seen the weakest rebound in spending. That may add to worries that working from home is hurting cities’ economies.
Alex Brazier, the Bank’s head of financial stability, said there was unlikely to be a strong return to the office. “People have a caution about the public health issues,” he said. “Public transport capacity is a related factor there.”
He added that “with Covid-safe guidelines it’s not possible to use office space, particularly in central London and densely populated places like that, with the intensity that we used to”.
Separately, Bailey again backed the chancellor’s plan to wind down the furlough scheme in October.
He said the scheme “was designed, very sensibly, for a general labour market feature, which was 30 per cent of the population not being able to work”.
But he added: “The labour market’s changed and the nature of Covid has changed.” Bailey said these changes required “a sort of change in nature of thinking about what the right policies are”.
Bailey also said that inflation was likely to be stronger in the coming months than the Bank expected in August.
He said this was because companies had not passed on the government’s VAT cuts as much as the Bank had predicted. Slightly higher oil prices would also have an effect, Bailey said.