U.K. Economy Faring Better Than Feared But With Cliff Edge Ahead

(Bloomberg) -- The U.K. is experiencing a stronger recovery than expected from the coronavirus crisis but will face a major hurdle when government support programs for jobs are wound down, according to two of the nation’s top financial professionals.

Bank of England chief economist Andy Haldane, the only policy maker to vote against an expansion of the institution’s bond-buying program this month, said economic output has dropped less than estimated and consumer spending appears to be picking up.

Meanwhile, Barclays Plc Chief Executive Officer Jes Staley said there is a “second storm coming in a couple of months” when a furlough program that was launched in March to preserve jobs through the lockdown is phased out.

The comments highlight the high degree of uncertainty facing the nation as the government tries to reopen the economy while keeping the coronavirus at bay.

The murky outlook even has investors speculating again that the BOE will cut interest rates below zero. While such bets had faded in recent weeks, money markets are now pointing to the central bank easing its benchmark rate 11 basis points by May next year and as much as 14 basis points by next Autumn from the current 0.1%.

The yield on two- to five year gilts fell to minus 0.111% and minus 0.078% respectively Tuesday, both record lows.

Prime Minister Boris Johnson flagged the jobs risk in a speech on Tuesday in which he warned of a “real crisis” in unemployment in coming months, even as he pledged more infrastructure spending to pull the U.K. out of its slump.

Haldane said in a webinar on Tuesday that the economy probably shrank 20% compared with its pre-Covid peak in the second quarter, 7 percentage points less than in the BOE’s last official scenario in May.

Figures earlier in the day showed output contracted more than projected in the first quarter as consumers saved more and spent less.

But since the May forecasting round, “positive news on demand has, in my opinion, more than counterbalanced the rise in downside risks to employment,” Haldane said.

The gravest risk lies in the labor market, he said. As the government’s furlough program tapers in August, there’s a chance that workers aren’t hired back by employers, which could create a negative feedback loop and result in lower spending.

Staley echoed that view in a Bloomberg TV interview, saying that while the recovery has been a bit better than expected, “we’re not out of the woods yet.”

The furlough program funded about 9 million jobs in the U.K. by mid-June. When that ends, it “will be interesting to see what happens to the unemployment,” he said.

Haldane said he remains open-minded on further monetary easing should the economy require it. Asked about the possibility of negative interest rates, he said the BOE is reviewing the policy, an exercise that will stretch into the second half of the year.

Quantitative easing was the bank’s marginal policy tool in June and is likely to be going forward as well, he said.

But he also said the first line of defense against the crisis is fiscal policy, and there’s little that a central bank can do to fix sectoral shifts in the economy or structurally high unemployment.

“Before the Covid crisis, I expressed concerns about the growing ‘dependency culture’ around monetary policy,” he said. “Recent events have done nothing to allay those concerns.”

BOE Deputy Governor Jon Cunliffe echoed some of Haldane’s sentiments in an online discussion later Tuesday, saying it made sense to keep the possibility of all tools under review. The pandemic crisis is not over, he said, and neither is the potential for financial market stress.

©2020 Bloomberg L.P.