Bailey: Covid impact on economy could be less than past recessions

THE “long-term scarring” to the UK economy from the Covid-19 crisis could be smaller than in past recessions, the Governor of the Bank of England has suggested.

Andrew Bailey said that, while gross domestic product was expected to be 12 per cent lower at the end of this month than it was before the pandemic started last March, the extension of UK Government support would help mitigate some of the worst effects.

“There are reasons to believe that so-called long-term scarring damage to the economy will be lower than in past recessions,” the Governor said at an event hosted by the Resolution Foundation think-tank.

He pointed out that unprecedented levels of fiscal support would help to limit the amount of scarring, noting that the country’s labour force was more mobile than in the past and would find it easier to switch to new jobs.

This was very different to past major shifts, such as during the 1980s when the level of skill involved in a job limited where people could go if their industry was struggling.

Mr Bailey said that extending the furlough scheme to September, beyond the date when the Covid-19 restrictions on businesses were expected to be lifted, would likely cap a sharp increase in unemployment that had previously been expected.

However, the Bank has not done its official assessment on unemployment yet since Chancellor Rishi Sunak’s Budget last week. Its forecast in February was that unemployment would peak at 7.8% later this year.

Mr Bailey said: “I would expect we would have a lower profile of unemployment certainly in the near-term and I probably think it would be lower throughout but we haven’t done that work yet; so, I reserve judgment.”

Speculation has raged throughout the crisis whether the Governor and his colleagues on the Bank’s Monetary Policy Committee would decide to slash interest rates to below zero for the first time.

The Bank’s base rate was cut to 0.1% – a historic low – early in the pandemic but the MPC members remain unconvinced that it should be cut to negative.

A negative rate could result in customers being forced to pay to keep their money in a bank account, although those with higher amounts in their accounts, such as companies, are more likely to see the impact.

Mr Bailey pointed to work from the European Central Bank, which suggested negative rates could be a good way to help unlock investment during a recovery rather than during the crisis itself.

“They actually used them in the recovery from the euro area crisis, not actually in the crisis. It’s also interesting that no central bank that’s currently using negative rates has made it more negative during the last 12 months, which I don’t think is an accident,” explained the Governor.

He added: “They have argued in their research work that... it may have some impact on stimulating investment in a recovery.”