Pandemic Risks Inflicting Longer-Term Damage on U.K. Economy
Some companies are already describing the current shock as being worse than the 2008 financial crisis.
(Bloomberg) --
The Bank of England said the economic fallout from the coronavirus pandemic risks becoming entrenched, with some companies already describing the current shock as being worse than the 2008 financial crisis.
“There is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment,” BOE officials said, according to the minutes of their latest policy meeting published Thursday. “The economic consequences of these developments are becoming more apparent and a very sharp reduction in activity is likely.”
The warning suggests that a recovery would swiftly follow a recession in the first half of the year -- the base scenario of many economists -- may not be a forgone conclusion. The outbreak has already shuttered large parts of the economy, with the government heavily restricting non-essential movement for the next three weeks in an attempt to check the spread of the virus.
BOE officials said that while the measures they have taken so far helped stabilize markets and improve liquidity, they stand ready to provide further stimulus if needed. They voted unanimously to keep interest rates and their bond-buying program unchanged, after loosening policy considerably in coordinated action with the Treasury.
The benchmark interest rate was left at a record-low 0.1%, after policy makers cut it from 0.75% at two emergency meetings this month. At the second meeting, on March 19, officials also said they will buy 200 billion pounds ($239 billion) of bonds. There wasn’t a strong case for further changes in policy at this week’s meeting, the BOE said.
The BOE took swift action in response to the crisis in coordination with the Treasury, which has unveiled a massive fiscal stimulus in an attempt to prevent the recession from causing mass unemployment.
What Bloomberg Economists Say...
“The Bank of England kept its powder dry at today’s meeting after unleashing a huge amount of emergency stimulus this month. The decision and narrative running though the minutes are consistent with the view that the shock from the pandemic will be large, but temporary.”
-- Dan Hanson, senior U.K. economist. Read full REACT.
“Very early reports from several companies suggested that the scheme would save jobs that might otherwise have been lost,” the BOE said.
Still, nearly 500,000 Britons have applied for state support payments in the last nine days. If all of those claimants are jobless, the unemployment rate could already have risen to 5.3% from the current level of about 4%, according to Bank of America Merrill Lynch research.
That would already be around half the unemployment increase during the global financial crisis, BofA economists wrote.
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