In todays video we will talk about the Bank of England’s forecast that the Coronavirus epidemic will push the UK economy into its deepest recession in 300 years and their decision not to provide any new stimulus right away.
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The Bank of England in its monetary policy report this morning put forth its predictions for the UK economy.
Suggesting that output would fall 3% in the first quarter followed by 25% in the second quarter an almost 30% drop in output drop in the first half of 2020 the fastest and deepest recession since the great frost in 1709.
The great frost of 1709 saw three months of deadly cold that led to a year of famine and food riots in Europe. everything turned to ice. Lakes and rivers and seas froze, the soil froze to a depth of a meter or more. Livestock died from cold in their barns and travelers froze to death on the roads.
The last time we have had an annual drop in real GDP of more than 4.5% was in 1945. The last time we have had an annual drop in real GDP of greater than 10% was in 1709.
These economic projections came with a warning to Britain’s banks that if they tried to stem losses by restricting lending, they would make the situation worse.
Andrew Bailey, the BoE governor, said a failure to lend would create a vicious circle of more bankruptcies and higher losses on loans that would come back to hit the banks themselves.
Mr Bailey said: “The better path for banks is to keep lending if the system ensures a good supply of loans, we’ll get a better outcome.”
Commercial banks responded that they were committed to lending through the crisis.
the BoE warned that, even with adequate lending, the economy was bound to take a big hit; household spending has already dropped about 30 per cent since early March.
The central bank forecast that the UK’s unemployment rate was likely to rise to 9 per cent by next year, even with the government’s job retention scheme protecting many employees from being laid off. That would mean a higher rate of joblessness than after the 2008 financial crisis. They forecast that inflation would dip to 0.5 per cent in 2021, before returning to the 2 per cent target the following year.
On a more positive note, Mr Bailey said the economic rebound was likely to happen “much more rapidly than the pullback from the global financial crisis”.
They assume that long-term damage to the economy would be only 1.5 per cent GDP coming from missed business investment in 2020. Otherwise the prediction is for a V-shaped recovery.
Bailey defended the decision not to take more immediate action, saying the measures announced in March had not been exhausted and that they have made a very clear commitment to do what it takes to support the economy consistent with the inflation target.
All MPC members agreed that more stimulus might be needed in future. The central bank is signalling that more QE is in the pipeline.
The BoE analyzed if the financial system could cope with their expected recession.
They say that that banks will lose less money than in their latest stress test and that “the core banking system has capital buffers more than sufficient to absorb losses”.
The BoE did stress that the pandemic would severely hit corporate cash flow. Government support would plug some of the gap, but there remains a £60bn additional deficit that banks would need to cover to stop viable businesses from going under.
The central bank warned that if banks failed to provide credit to their business customers, they might see a short-term benefit in reduced losses, but this would cause more companies to fail and unemployment to rise another 2 percentage points, ultimately leading to larger losses.
