BOE Fears Mount That U.K. Faces Jobless Recovery From Crisis

(Bloomberg) --

The Bank of England is growing increasingly worried that British job losses will turn out worse than expected and threaten the recovery from the coronavirus pandemic.

Policy makers showed their concern on Thursday as they added another 100 billion pounds ($124 billion) to their bond-buying program, warning that there is a risk of “higher and more persistent unemployment” with repercussions for economic growth and inflation.

The government has taken unprecedented steps to protect jobs by paying most of the wages of workers while businesses are shuttered. Yet that can’t save employees if companies close down permanently or decide they’ll have to retrench well past the end of that support.

“I’ve no doubt we’re looking at the steepest trajectory of a rise in unemployment because of the nature of what’s happened -- the rapid close down of the economy,” BOE Governor Andrew Bailey told reporters.

Jobless claims have soared to almost 3 million, and the number of workers on furlough programs is higher than the BOE had anticipated. Government support is scheduled to expire in October, and firms will have to take on more of the share of the burden from August.

The cost of the government support was revealed on Friday, with figures showing a huge surge in borrowing and a jump in debt to more than 100% of GDP.

Previous scenarios laid out by the BOE and the Office for Budget Responsibility predicted unemployment would jump to about 10% from 3.9% now. Bailey wrote in May that benefit claims data suggested the rate had already reached that level.

The feeble outlook for jobs contrasts with signals that economic output hasn’t been hit quite as hard as feared. The BOE now estimates that GDP in the second quarter was about 20% below the fourth-quarter -- pre-virus -- level, compared with an earlier estimate of 27%.

The government this week allowed non-essential stores to reopen, and Prime Minister Boris Johnson encouraged people to “shop with confidence.”

BOE Chief Economist Andy Haldane even voted against the increase in monetary stimulus, arguing that the economy was recovering sooner and faster than predicted.

Bailey noted that recent labor-market evidence was sometimes contradictory, but said the overall news was “to the downside.” The minutes of the BOE’s policy meeting showed the employment outlook has “weakened materially.”

“Current indications from business surveys suggested that furloughed employees might not be fully reabsorbed into the workforce as current government support measures started to be withdrawn later in the year.”

-BOE minutes

A deteriorating labor market will put pressure on the government to do more to support workers. Bloomberg Economics sees the unemployment rate rising to 7% this quarter, and warns it could go higher as the furlough program is wound down. That’s particularly the case if social distancing and subdued demand keep a lid on business activity.

“There’s 9 million people furloughed and there’s isn’t any real clarity in how many of those go back to jobs,” said David Page, head of macroeconomics at AXA Investment Managers. “We’re unlikely to get that revealed until we’re into the fourth quarter really. That’s when we’ll get a more genuine feel for the strength of the labor market.”

©2020 Bloomberg L.P.