BOE-Sunak Double Act Attempts to Boost Ailing U.K. Economy
(Bloomberg) -- The U.K. government and central bank unleashed a fresh wave of stimulus into the struggling economy on Thursday, acting in conjunction and more aggressively than predicted as the coronavirus forces another lockdown.
At 7 a.m, the Bank of England boosted its bond-buying program by a larger-than-expected 150 billion pounds ($196 billion), flooding the economy with cash to spur demand and lower government borrowing costs.
The move was followed hours later by Chancellor of the Exchequer Rishi Sunak’s announcement that the government is extending its furlough program until March, rather than ending it when the latest curbs on businesses and movement expire on Dec. 2.
The measures aim to counter the impact of a resurgent pandemic that has forced the government to order pubs, restaurants and non-essential shops to shut. With the outlook already clouded by the U.K.’s looming exit from the European Union’s single market -- potentially with no trade deal -- the nation risks a painful spike in joblessness.
Sunak told Parliament that the double injection of stimulus shows “all economic and monetary institutions are playing their part.” Governor Andrew Bailey said in a press conference that it is “important that we take prompt, strong and coordinated action.”
Spending on job support from November to March, along with an increase in help for self-employed workers, could cost around 25 billion pounds, Bloomberg Economics estimates.
The measures announced on Thursday bring the government’s bill for the crisis to well above 200 billion pounds. Total U.K. debt now stands above 2 trillion pounds.
The BOE has now eased monetary policy four times since March, cutting its benchmark interest rate to a record 0.1% and stepping up its quantitative easing program. Its loose policies, while ultimately aimed at ensuring price stability, also give the government room to increase crisis spending without worrying about spiraling debt costs.
What Bloomberg Economics Says...
“We don’t expect any more QE. But with the economy taking another hit from a second lockdown, the chances of the BOE having to do more, either through negative rates or QE, have risen.”
-- Dan Hanson, senior U.K. economist
To read his full report, click here.
The coordinated economic response since the start of the outbreak has won praise from economists and global institutions such as the International Monetary Fund.
“The governor and I are in constant communication as the situation evolves,” Sunak said. “Our responses are carefully designed to complement each other, and provide certainty and support.”
The furlough program, which Sunak had previously insisted should be phased out, pays 80% of wages for the hours that workers are unable to work. It will now last more than a year, having been originally intended to last just three months during the first peak of the pandemic in the spring.
Still, the actions can only partially counter the downturn. The BOE now expects the economy to contract in the fourth quarter, disrupting what had already been a fragile rebound.
It had predicted unemployment would reached 7.75% in 2021, though the extra government support may mean the peak is lower, according to Bloomberg Economics.
“Clearly the tightening of the restrictions was a game changer,” Philip Shaw, chief economist at Investec Bank Plc, said. “They seem to be much more fazed by the idea of the contraction in the economy over the fourth quarter, which is virtually inevitable, and also at the back of their minds they fear a return to market conditions like we saw in March.”
The opposition Labour Party criticized Sunak for a piecemeal approach to aid that has seen him announce five major changes to the policy in six weeks. They also said the new support comes too late for those who have already lost their jobs.
This week brought more evidence those losses are mounting, with big-name retailers including J Sainsbury Plc and John Lewis Partnership Plc have both announced planned cuts in recent days.
The BOE expects 5.5 million workers will be furloughed in November, less than the 8.9 million who used it at its peak earlier this year.
The central bank slashed its estimates for economic growth, lowering the third-quarter forecast to 16.2% from 18.3% and saying they now expect a 2% contraction in the last three months of the year.
The economy will shrink more this year than previously anticipated, and the 2021 recovery will be slower, though Bailey said the country is “not in the middle of a double-dip recession” -- meaning the BOE doesn’t expect two quarters of contraction.
GDP won’t get back to its pre-crisis level until early 2022, the forecasts show.
“It’s an extraordinary situation,” Bailey said. “It’s by no means over.”
©2020 Bloomberg L.P.