Anal­y­sis; Com­ment:

Tim Wal­lace as­sesses the cen­tral bank’s fore­casts for jobs, lend­ing, neg­a­tive rates and the prospect of a rapid V-shaped re­cov­ery

The Daily Telegraph - Business - - Front Page -

Three months ago, the Bank of Eng­land would not even make a fore­cast about the econ­omy. Such was the scale of the pan­demic and the lock­down’s im­pact that the City of Lon­don’s great­est fi­nan­cial in­sti­tu­tion was not pre­pared to nail its flag to any par­tic­u­lar num­bers.

In­stead it came up with a “sce­nario” to give an idea of the cost. But that was in May. Now An­drew Bai­ley and his econ­o­mists have gath­ered enough in­for­ma­tion to piece to­gether a fore­cast. It is re­mark­ably chirpy, at least by the stan­dards of this most un­usual of years.

This is what we learned from Au­gust’s Bank of Eng­land up­dates.

‘V’ shape

When Covid struck, econ­o­mists hoped the re­ces­sion would fol­low a “V” shape: a rapid crash in lock­down, then an equally rapid re­cov­ery as nor­mal­ity re­turned. As the sever­ity of the pan­demic be­came clear, this gave way to fears of a much longer crunch.

Yet now the econ­omy is reopen­ing, the Bank ap­pears hope­ful some­thing like a “V” could take place. A strong re­bound is hap­pen­ing in some parts of the econ­omy. Con­sumer spend­ing is back within 10pc of “usual” lev­els, up from a drop of 30-40pc in lock­down.

The hous­ing mar­ket has “re­turned to close to nor­mal lev­els”. Most fur­loughed staff are back at work.

The Bank thinks GDP dropped by just over 20pc from peak to trough, rather than al­most 30pc an­tic­i­pated in its May sce­nario. That trans­lates to a fall in GDP of 9.5pc over 2020 as a whole, rather than 14pc as per May.

But the big­ger drop was ex­pected to be fol­lowed by a 15pc re­bound in 2021. Now the rise is ex­pected to be just 9pc, in­di­cat­ing a lop-sided “V”, tak­ing longer to re­turn the econ­omy to its pre-Covid size.


The strug­gle to re­cover comes in two key parts. Firstly, it will take time for de­mand to re­turn. Peo­ple still fear the virus. Those who lose, or fear los­ing, their jobs will cut spend­ing.

Se­condly, the econ­omy’s un­der­ly­ing ca­pac­ity is tak­ing a hit. Not ev­ery busi­ness or even in­dus­try will re­cover. With lower in­vest­ment and in­no­va­tion, the Bank ex­pects the ca­pac­ity of the econ­omy will still be 1.5pc lower at the end of its three-year fore­cast than be­fore the out­break.

Job­less­ness is an­other threat. The Bank ex­pects un­em­ploy­ment to hit 7.5pc this year, which is less se­vere than the fi­nan­cial cri­sis and short of the 9pc pre­vi­ously an­tic­i­pated, but still a fear­some in­crease from be­low 4pc be­fore Covid-19 ar­rived.

It will fall to 6pc next year and only come close to pre-pan­demic lev­els at 4.5pc in 2022.

Neg­a­tive rates

This fore­cast has been up­graded, but still shows a ma­jor hit to the econ­omy. An­a­lysts are scep­ti­cal. Ge­orge Buck­ley at No­mura calls it “too op­ti­mistic”. Kal­lum Pick­er­ing at Beren­berg Bank says it will take un­til 2023 be­fore the econ­omy gets back to its late-2019 size, more than a year af­ter the Bank of Eng­land’s fore­cast.

So what more can the Bank do to boost the econ­omy if growth falls short of ex­pec­ta­tions? Neg­a­tive in­ter­est rates could be one an­swer.

The Bank’s anal­y­sis in the Mon­e­tary Pol­icy Re­port listed a se­ries of rea­sons why this could be a bad idea, as it po­ten­tially harms bank lend­ing.

“As a re­sult, neg­a­tive pol­icy rates at this time could be less ef­fec­tive as a tool to stim­u­late the econ­omy,” said the anal­y­sis.

Yet Bai­ley in­di­cated it was al­ready in the Bank’s “tool­kit”, sug­gest­ing it was ready for use if and when he deemed it ap­pro­pri­ate.

He said it might be best to go sub-zero dur­ing the re­cov­ery, rather than at the peak of a cri­sis.

Econ­o­mists at Citi ex­pect the Bank to take rates to zero in Novem­ber, add an­other £50bn to quan­ti­ta­tive eas­ing, and then go neg­a­tive in 2021.

Keep on lend­ing

Banks are un­der clear in­struc­tions to keep on lend­ing. They face credit losses of up to £80bn, as some busi­nesses and house­holds will strug­gle to re­pay their debts, but the Fi­nan­cial Pol­icy Com­mit­tee told lenders they still have plenty of ca­pac­ity to dish out loans. It es­ti­mates lenders could han­dle a re­ces­sion twice as big as this, based on last year’s “stress tests” of their fi­nan­cial buf­fers.

On top of that, fam­ily fi­nances are in a bet­ter po­si­tion than they were go­ing into the credit crunch. More press­ingly, the Bank wants to make sure fi­nan­cial mar­kets can han­dle big eco­nomic shocks without hav­ing to rely on enor­mous in­jec­tions of liq­uid­ity such as that seen in March.

Ten­sions have calmed in re­cent months, but “un­der­ly­ing vul­ner­a­bil­i­ties re­main and dis­rup­tion could resur­face in the face of cer­tain trig­gers. There could also be an am­pli­fied tight­en­ing of credit con­di­tions in the event of a large wave of down­grades of cor­po­rate bonds or lever­aged loans”.

That is the next big risk to watch, for big busi­nesses, the in­sti­tu­tions which lend to them, and so the econ­omy as a whole.

The Bank of Eng­land’s head­quar­ters in the City of Lon­don. The cen­tral bank has is­sued a rel­a­tively upbeat anal­y­sis of the UK’s eco­nomic pic­ture, com­pared with May

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