Bailey follows Micawber in the hope ‘something will turn up’
Governor Andrew Bailey is clearly taking his Charles Dickens on holiday this summer, as there was more than a dash of Wilkins Micawber-esque optimism in the Bank of England’s latest forecasts.
The David Copperfield clerk, whose catchphrase was that “something will turn up”, might have scribbled the forecasts that saw a far shallower decline in growth this year, a smaller rise in unemployment and an economy back to pre-pandemic levels by the end of next year.
In fairness to the Bank, data such as retail sales has been stronger than it expected in May, prompting chief economist Andy Haldane’s “so far, so V” comments in June.
But the past is no guide to future performance and in a week that has seen yet more job losses, the Bank’s rosier view on unemployment jarred.
The expected peak in the jobless rate was cut to 7.5pc, and unemployment is forecast to drop almost all the way back to pre-Covid levels of about 4pc by the end of 2022.
Many City economists would bite your hand off for that kind of result as of now. The Government’s furlough scheme has already begun to be wound down and will end completely in October, threatening mass culls.
Some sectors will take a persistent hit to demand, some have found more efficient ways to work, and there is also a mismatch between the skills of laid-off workers and those that hiring firms need – but the Bank has kept its
‘An abrupt transition to WTO rules could scupper the Bank’s predictions of a 9pc bounceback next year’
long-term estimate of the natural rate of unemployment unchanged.
Threadneedle Street’s comments that Covid-19 could hurt the job market harder “if it results in significant longer-lasting changes to the structure of economies” feel like they should be in its central scenario rather than an outlying risk.
The Monetary Policy Committee also assumes an immediate and orderly move to a free trade agreement with the European Union at the beginning of 2021. As that is the current stance of government policy, however unlikely it seems, the Bank has little choice in this. But an abrupt transition to World Trade Organisation rules and the friction that entails could well scupper the Bank’s predictions of a 9pc bounceback for the economy next year.
The Bank admits that its own forecasts are hamstrung by the unknowable path of the virus. That means the downside risks in its coloured fan charts are even more voluminous than usual: they don’t include another national lockdown, or a second wave, but they do build in the risks of various localised restrictions as and when the virus flares up again.
That said, if you really have no idea what will happen, why not be upbeat rather than risk talking the economy into a self-fulfilling funk? Overall, it was interesting that the financial markets took the report bullishly.
The pound moved higher against the dollar as Bailey played down the prospect of negative rates even in the act of putting it on the table, giving himself plenty of wriggle room for action later if needed.
But we can only hope the Bank still has such reason for relative cheer in chilly November.