Second England lockdown fuels fears of Covid double-dip recession
Bank of England policymakers are expected to inject up to £100bn into the economy when they meet this week amid mounting fears that the fourweek lockdown for England will lead to a double-dip recession.
Threadneedle Street’s nine-strong monetary policy committee (MPC) will spend the next few days weighing up the impact of the renewed closure of large chunks of the economy before announcing its latest decisions on Thursday.
The MPC was already poised to announce gloomier economic forecasts even before the prime minister announced the drastic tightening of restrictions, and fresh action to support economic activity is now seen by the financial markets as inevitable.
The economy shrank by 20% in April – the most severe month of the first lockdown – and one leading analyst predicted that it could contract by up to a further 10% as a result of the curbs coming into force later this week.
Gerard Lyons, economic adviser to Boris Johnson when he was London mayor, said: “The economy will contract and while not by as much as it did in the initial lockdown, it will still be significant, possibly as much as 7.5-10%.
“I expect unemployment to rise from 1.52 million to 3 million and large swathes of firms to be left nursing debt that will inhibit their ability to recover.”
Paul Dales, chief UK economist at Capital Economics, said he had been expecting UK GDP to move sideways in November but was now expecting a monthly fall of 5%.
“The economy is likely to show zero growth or even have a small decline in the fourth quarter of the year,” Dales said. “This has all the signs of a doubledip recession.”
The City is braced for a marked selloff in the share of retail and hospitality companies – the two sectors hardest hit by the curbs on activity – when trading resumes on Monday.
Reports of the government’s U-turn on a lockdown came after the financial markets closed on Friday following a week in which the FTSE 100 Index dropped by almost 5%.
It is thought unlikely that the Bank’s MPC will reduce interest rates – already at just 0.1% – but instead rely on the money creation programme known as quantitative easing (QE) to boost lending and combat the imminent contraction of the economy.
With high street sales falling and consumer confidence sliding backwards in recent weeks, City analysts already believed the MPC was likely to increase QE from its current level of £745bn when it meets on Thursday.
Quantitative easing is a form of electronic money, created by the Bank of England and used to purchase UK government bonds, mainly from financial institutions. The Bank owns almost half of the UK government’s debts.
The effect is to depress long-term borrowing costs and encourage banks to lend to commercial businesses.
The Bank policymakers, who have increased the central bank’s QE programme by £300bn since March, are also likely to be concerned about ongoing Brexit talks, which have hit investment and could cause severe disruption to EU/UK trade if negotiators fail to agree a deal.
The Bank’s chief economist, Andy Haldane, has stressed in recent speeches that the UK economy rebounded quickly from the first lockdown although several of his colleagues, noticeably the academic Silvana Tenreyro and former hedge fund economist Gertjan Vlieghe, have highlighted the UK’s weak growth rate.
Martin Beck, senior UK economist at the consultancy Oxford Economics, said an additional injection of QE could “boost sentiment” in financial markets and among businesses and consumers.
“It would also help guard against any unwarranted rise in government borrowing costs were market turmoil to return.”
US Federal Reserve policymakers will also meet next week, though they are not expected to discuss a shift in policy during the final few hours of the presidential election campaign.