UK central bank chief urges caution as recovery hopes rise

Bank of England governor Andrew Bailey urged the UK to be cautious about its recovery from the coronavirus pandemic despite growing economic optimism by consumers and businesses.

Mr Bailey said the Covid-19 pandemic had been “both a demand and supply shock” for the economy.

While the vaccine programme has been “a huge achievement”, the economy is poised to start at a lower level of activity because of the latest round of restrictions, he said.

“There is light at the end of the tunnel,” Mr Bailey said in an online seminar that was hosted by the Resolution Foundation yesterday.

“A note of realism though: our latest forecast in essence painted a picture of an economy that starts at a lower level of activity as a result of the current restrictions and people’s natural caution associated with the renewed onset of Covid, which then gets back to where it was pre-Covid by the early part of next year.”

Mr Bailey said the economic impact of the crisis had “been very large”, with UK gross domestic product by the end of the first quarter expected to be 12 per cent below the level seen at the end of 2019, which he called “a huge shortfall”.

He also noted that the economic effects had been uneven across sectors, with those “that conduct activity involving large amounts of close human contact” the most seriously affected. This, in turn, affects “low-paid workers, female workers and ... a concentration by ethnicity as well”.

The UK economy is poised to return to where it was before Covid-19 by early next year while the BoE is expected to meet its 2 per cent target for inflation.

However, Mr Bailey called for “cautionary realism” about the extent of the economic recovery, which he said would be helped by the central bank’s ultra-low interest rates and its bond-buying programme, whose asset base grew to £895bn in November.

His economic outlook comes after UK Chancellor Rishi Sunak’s budget last week extended Covid support measures such as the furlough programme, which will now run until the end of September.

Under Mr Sunak, Britain’s debt is at its highest since the Second World War.

It will hit about £355bn, or 17 per cent of GDP in the 20202021 financial year.

The budget resulted in corporation tax rising from 19 per cent to 25 per cent, while tax thresholds on income tax were frozen until 2026. There were also measures to support economic growth through significant investment in infrastructure, skills and innovation.

Mr Bailey said this investment will potentially ease one of the drags on Britain’s economy.

However, he stressed that considerable uncertainty remains over how Covid-induced changes in the way Britons work, consume and spend would evolve from here.

“We will work more from home than we used to and shop more online because new habits will persist to some degree, and to the extent they unwind, it will be over a period of time,” he said.

Before the crisis, only 5 per cent of employees worked mainly from home. However, “remote working has become much more common, and businesses have delivered services in new ways, often using technology to reduce personal contact”, he said.

The governor, who tuned into the online seminar from his office at the central bank for the first time this year, said that many people expect remote working to become more common after the coronavirus pandemic ends.

“Half of new remote workers say they would like to continue to work from home all or most of the time, even when lifting restrictions permits a return to normal working patterns,” he said.

“Employers in some sectors also expect the proportion of staff that regularly work from home to more than double and many contacts of the bank’s agents expect a hybrid model of two to three days a week spent in the workplace to become the ‘new normal’ for office workers.”

On the consumption side, he said the surge in online shopping had hastened a pre-existing trend, with 33 per cent of total sales now accounted for by online sales, up from 20 per cent last year.