U.K. Economic Scars Could Be Deeper Than Bank of England Thinks

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The U.K. economy will likely be smaller at the end of 2021 than it was before plunging into a record recession this year, according to a Bloomberg survey that casts fresh doubt over Bank of England projections.

Calculations based on the median estimate of economists polled this month show gross domestic product is set to be around 5% below its pre-pandemic level. The central bank sees output fully recovering by the same point.

The contrast highlights the risk that policy makers are underestimating the extent of the damage that the coronavirus will inflict on the economy in the long run.

The U.K. is already rebounding from the depth of the recession, as the government allows more businesses to reopen. But the imminent winding down of state wage-support programs raises the specter of mass unemployment and a wave of business failures.

Fears about a renewed spike in infections and the risk of a messy split with the European Union will add to the mounting pressure on Chancellor of the Exchequer Rishi Sunak to extend government aid beyond October, a demand he has rejected so far.

BOE Chief Economist Says U.K. on Track for Quick Recovery: Mail

The Bloomberg survey also suggests that output could still be catching up by the end of 2022 if the economy maintains its 2021 growth rates, raising questions about whether the Office for Budget Responsibility too is overly upbeat about the strength of the recovery.

What Bloomberg’s Economists Say...

“We think the recovery will lose steam in 4Q. That’s partly due to residual social distancing measures preventing a return to normal and also reflects consumer caution related to ongoing health risks and concerns about employment prospects.”

-- Dan Hanson, senior U.K. economist. Read his full INSIGHT.

The fiscal watchdog expects a return to pre-crisis levels by the fourth quarter of 2022, and any growth shortfall could lead it to increase its already stratospheric forecasts for government borrowing.

While authorities around the world are struggling to assess the impact of the worst pandemic in living memory, the extent of the economic fallout leaves little room for policy error.

The BOE’s projections came under scrutiny earlier this month, after economists and investors described its Aug. 6 short-term assessment of the economy as surprisingly upbeat. The Bloomberg survey expects the central bank to keep its benchmark rate at 0.1% but add 50 billion pounds ($65.6 billion) to its asset-purchase program by December.

The survey was carried out from Aug. 7 to Aug. 13, a week in which data showed the economy shrank 20.4% in the second quarter, the biggest slump among advanced industrial nations. Almost 750,000 people have lost paid employment since March.

U.K. Jobs Crisis Worsens as Employment Drops Most Since 2009

Unemployment is on course to peak at 8.1% in the fourth quarter, above the high of 7.5% projected by the BOE, and GDP is set to grow just 6.4% in 2021 after contracting almost 10% this year.

©2020 Bloomberg L.P.