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Bank of England Predicts Worst Contraction Since 1706

BoE predicts GDP will decline 14% in 2020, 25% in Q2 and unemployment expected to rise to 9%.

(Investopedia) Britain's central bank today voted to maintain interest rates at 0.1% and continue its £200 billion corporate and government bond-buying program. Two of the 9 members wanted to hike the bond purchases by £100 billion and the bank indicated it may have to deliver more stimulus soon due to "prospective weakness in employment and inflation, and downside risks around aspects of the medium-term outlook." Governor Andrew Bailey advised banks to keep lending if they want to save the economy and prevent greater credit losses and weakening of their capital positions in the long run.


The Bank of England also revealed a bleak outlook for the country in its May Monetary Policy report, its first since the outbreak. It expects the economy to contract by 25% and the unemployment rate to more than double to around 9% in the second quarter. GDP is expected to fall 14% for the year as a whole. This would make it the biggest slump the nation has seen since it contracted 15.3% in 1706 at the time of The War of Spanish Succession. U.K. GDP declined 4.2% in 2009 during the financial crisis.


Consumer spending and business investment are projected to be 30% and 40% lower in Q2, respectively, than they were at the end of 2019. CPI inflation is expected to fall below 1% due to the fall in oil prices and demand.

The bank predicts economic activity will pick up relatively rapidly in the second half of the year. However, the recovery to the previous path will be gradual because "a degree of precautionary behavior by households and businesses is assumed to persist.""Voluntary social distancing is assumed to unwind only gradually over the next year. That is broadly consistent with the experience of Hong Kong following the SARS outbreak. It is also assumed that concerns about the economic outlook weigh on spending. Indicators of household confidence have fallen very sharply over the recent past. Survey and financial market measures of business uncertainty suggest that has risen substantially too. While confidence is likely to rise, and uncertainty to fall, as the economy recovers, that happens only gradually in the scenario," said the report 


Today's scenario is based on social distancing measures and government support schemes remaining as they are until early June, before being gradually unwound by the end of Q3. It also assumes that the U.K moves to a comprehensive free trade agreement with the EU on January 1, 2021. Trade talks aren't going smoothly, reports the BBC.


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