Britain’s central bank warns that the spread of Covid-19 and the measures to contain it could wipe 14% off UK GDP this year
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Yael Selfin, chief economist at KPMG UK, fears the UK economy could shrink even more sharply than the Bank of England has forecast.
The Brexit cliff-edge at the end of the year, when the UK-EU withdrawal agreement ends, creates added uncertainty, she writes:
“Despite the stark numbers issued by the Bank of England today, additional pressure on the economy is likely. Some social distancing measures are likely to remain in place until we have a vaccine or an effective treatment for the virus, with people also remaining reluctant to socialise and spend. That means recovery is unlikely to start in earnest before sometime next year.
“Looking at the medium term, beyond the impact of reduced investment, other forces could to be in play dampening future productivity. Supply chains are likely to be reconfigured in light of this crisis, potentially increasing geographical diversification and reducing efficiency in order to increase resilience. ‘Just in time’ operations are also likely to be a thing of the past, further eroding productivity. On the other hand, we could see significant consolidation among SMEs, lifting productivity among the long tail of underperforming businesses.
The only good news today is that the Bank expects this economic bombshell to be short-lived, and for the economy to bounce back rapidly. However, the MPC itself concedes it is flying blind to a large extent, warning that a pandemic like this is “especially difficult to quantify”.
“While the Bank of England did not change its monetary policy stance at today’s meeting, it is surely only a matter of time before they decide to. The 7-2 split on whether to increase asset purchases indicates a continued dovish bias from certain voting members.
With the Bank hoovering up gilts equivalent to those issued since the additional £200 billion in quantitative easing was announced, it will run out of firepower to support government spending within in months. Therefore, expectations will be high for an increase in the purchase target at the next meeting in mid-June.
The Covid-19 pandemic has forced the Bank of England to delay its much-anticipated bank climate stress tests.
The central bank has concluded that UK banks have enough to deal with, without calculating how they are positioned to handle the climate emergency (a key concern for former governor Mark Carney).
“Recognizing current pressures on firms, and in light of the responses to the December 2019 Discussion Paper on the Climate Biennial Exploratory Scenario, the PRC and FPC have agreed to postpone the launch of the exercise until at least mid-2021.
This delay reflects a desire to maintain the ambitious scope of the exercise, whilst giving firms enough time to invest sufficiently in their capabilities to allow them to deliver to a high standard.”