The Bank of England has warned coronavirus could see the economy plunge 14% this year in the worst annual fall since records began.
In its first official outlook on the economic toll taken by the Covid-19 pandemic, the Bank cautioned over a fall in GDP of close to 30% over the first half and for the unemployment rate to peak at 9%.
It said the fall should be temporary and that activity is expected “pick up relatively rapidly” as lockdown is eased.
We expect that there will be some longer-term damage to the capacity of the economyAndrew Bailey, Bank of England governor
But Bank governor Andrew Bailey braced the UK for some lasting economic scars from the crisis.
The Bank said it would take more than a year for the economy to recover from when the lockdown is lifted.
And even then, growth would not quite be back at the level seen since before the pandemic struck.
The grim scenario-based forecast came as the Bank held interest rates at the historic low of 0.1% after recent emergency action.
It kept its quantitative easing (QE) programme to boost the economy unchanged at £645 billion after unleashing another £200 billion of bond-buying in March.
Mr Bailey, who only took on the top job in March, said: “We expect the recovery of the economy to happen over time, although much more rapidly than the pull-back from the global financial crisis.
“Nonetheless, we expect that the effects on demand in the economy will go on for around a year after the lockdown starts to lift.
“We expect that there will be some longer-term damage to the capacity of the economy, but in the scenario we judge these effects to be relatively small.”
He added the Bank stood ready to support the economy further.
“There’s a commitment and a determination to take action should we need to,” he said.
We have published our quarterly #MonetaryPolicyReport alongside an interim #FinancialStabilityReport. Together, they provide a scenario for the path of the UK economy in the light of Covid-19 and assess the financial systemâs resilience to that scenario. https://t.co/3FIVG6rG2e pic.twitter.com/434WIhj8JX— Bank of England (@bankofengland) May 7, 2020
The Bank’s Monetary Policy Report showed gross domestic product (GDP) is likely to fall by around 3% in the first three months of 2020 and then plunge by a further 25% in the second quarter, though it said there was uncertainty over the forecasts.
Britain’s unemployment rate could hit 9% in the second quarter as the lockdown hammers firms across the economy, but it said Government schemes will help soften the blow, with six million people expected to be furloughed.
While the Bank is expecting annual GDP to soar back up to 15% in 2021, it warned the bounce-back will be held back as Britons continue some voluntary social distancing measures even after lockdown restrictions are eased.
Its nine-strong Monetary Policy Committee (MPC) voted unanimously to hold rates.
But two members of the MPC voted to increase QE by another £100 billion in a sign that more may be on the way soon.
Samuel Tombs at Pantheon Macroeconomics said: “The case for the MPC to do more to support the economy looks strong.
“Accordingly, we expect the doves to get their way and a further £100 billion of QE to be authorised in June.”
Rates have already been slashed twice, from 0.75%, since mid-March as part of the Bank’s measures to try and keep the economy afloat.
The Bank’s forecasts are slightly more optimistic than the outlook given by the Office for Budget Responsibility, which warned the economy could shrink by as much as 35% by the end of the second quarter.
In its separate Financial Stability Report, the Bank assured UK banks are strong enough to withstand the economic shock and continue supporting households and businesses.
It said it was in the interest of banks to keep lending, or face a wave of company bankruptcy that would leave them facing even steeper loan losses.