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UK GDP could shrink by 14% says BoE – no economic pick-up until Q4 2020

7 May 2020

The Bank of England’s latest monetary policy report suggests that overall, the UK economy could shrink by 14% this year as lockdown measures impact businesses and the UK unemployment rate hits 9%. 

Following severe global economic and financial disruption caused by Covid-19, the BoE has warned that the UK could suffer its worst recessionary period on record, contracting by as much as 25% during the three months from March to June. It expects company sales to be around 45% lower than normal during the second quarter and business investment 50% lower.

Consequently, it has kept the interest rate at its record low (0.1%) as the economy braces for that drop in activity.

According to the BoE’s forecasts, economic activity will not pick up until the latter part of 2020 and 2021, returning to pre- Covid19 levels by mid-2021. It predicts GDP growth of 3% in 2022.

Adrian Lowcock, head of personal finance, Willis Owen, described the latest forecasts as “the stuff of nightmares.”

Lowcock said: “The Bank’s latest forecasts are the stuff of nightmares, with the UK tipped to see its economy shrink by 14% this year – a far worse decline than the one seen during the global financial crisis.

“The only good news today is that the Bank expects this economic bombshell to be short-lived, and for the economy to bounce back rapidly. However, the MPC itself concedes it is flying blind to a large extent, warning that a pandemic like this is “especially difficult to quantify”.

QE vote

The Monetary Policy Committee also voted by a majority of 7-2 to leave its Quantitative Easing total unchanged at £645 billion. Two members had preferred to increase the target by £100 billion.

David Page, head of macro research, AXA Investment Managers, expects this to change in next month’s MPC meeting.

“It is immensely difficult to try and forecast the future outlook against a range of uncertainties. We fully recognise the uncertainties regarding supply impacts and different price movements in different sectors. However, we place more weight on the expected sharp demand shock associated with this pandemic. And our guess is that behavioural changes will create more persistent headwinds to demand growth.

“Moreover, in the context of a past decade that has seen a gradual lowering of inflation expectations on a global basis and technology add to structural capacity in the global economy, we suggest that the pandemic could exacerbate some of these disinflationary trends. With monetary policy already towards the limits of its support in many international economies and fiscal policy also stretched, we are more concerned about the risks of a longer-term undershoot of the inflation target. Many of these uncertainties will persist beyond the next few monetary policy meetings.”

AXA expects to see continued elevated gilt supply beyond July, which it believes would lead to an increase in gilt yields and a tightening in financial conditions if the QE programme were to expire as early as July. As such, AXA forecasts a QE extension of £100 billion to be announced in June, with further increases to follow.

Derrick Dunne, CEO, Beaufort Investment, said: “We are hopeful that economic recovery will eventually come thanks to government support, pent-up consumer demand and the overall health of the financial system.

“Certain areas of the economy such as hospitality and tourism will no doubt continue to suffer as social distancing measures to protect the population remain. These sectors will need a robust government response, such as industry wide testing, a vaccine or a dramatic change in the transmissibility of the virus to see things improve.”

Meanwhile, Richard Pearson, director, EQi, said investors should continue to take a long-term view to their investments, despite the stark forecasts.

Pearson said: “The Bank of England’s warnings over the economy are stark. The fact the committee were split over more energetic stimulus measures that we have already, shows how far into the unknown we are. However, the detail in the Bank’s report shows that GDP, despite crashing this year, will bounce back to pre-coronavirus levels by the middle of 2021. This is a valuable indication that while painful, the crisis we are in will hopefully, although sharp, be relatively short.

“For individual investors the song remains the same. Investing is a long-term pursuit. Things may not be rosy now but a decent recovery will help the long term health of investments, despite current difficulties.”

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