The Bank of England calculates that the UK economy ended 2020 around 8% smaller than it was at the end of 2019. The emergence of Covid-19 caused an extraordinary collapse in output. Happily, the Bank is betting on a very strong bounce-back. The Bank forecasts that all of the ground we have lost during the last 12 months will be clawed back over the next 12 months – that the economy will return to its pre-crisis size by the end of March next year. This is an extremely upbeat assessment of our prospects, given we are currently in yet another lockdown – one which has forced almost one in three businesses to close – and that the future looks even more uncertain than usual. The Bank recognises that the early months of 2021 will be grim. A vaccine program is being rolled out but we are currently the fighting to keep a more infectious strain of the virus at bay with masks and social restrictions.
Meanwhile, the new custom rules, post-Brexit, are damaging trade between the UK and the EU in precisely the way the Bank of England predicted. But there are reasons to be optimistic.
The Bank assumes that restrictions will start to lift from April onwards and will have disappeared altogether by September, never to return. The Bank thinks we will be in a position to unlock with confidence thanks to the speed with which people in the UK are being vaccinated.
Almost one in six people have received their first jab, as off 2nd February. The Bank also believes households will be in a position to spend when they are allowed to go out again. Lockdown has caused hardship. Many people have lost their jobs or seen their earning fall, but an even greater number have remained in employment – thanks to furlough – and been forced to save. The Bank calculates that households amassed £125 billion of “excess savings” by November, a number that has since grown.
The Bank assumes around 5% of this will be spent when restrictions lift. If the number is higher, the recovery could be even stronger.
Despite the positive outlook, the Bank expects unemployment to peak at 7.75% in the middle of this year and the number of people out of work to reach 2.7 million (it was 1.7m, as of the end of November 2019). The Bank thinks there are 4.5 million people on some form of furlough and expects the vast majority to hold onto their jobs. The Bank continues to make preparations for negative interest rates. In theory, by lowering Bank Rate below zero the Bank would encourage banks to increase their lending to households and businesses, keeping money cheap to borrow and in plentiful supply.
In theory, we could get to a stage where people in the UK end up repaying less than they borrowed from their banks. In practice, there’s a limit to how far below zero Bank Rate can go. At some point, a tipping point is reached beyond which negative rates damage the profitability of banks and incentivise savers to keep their cash stashed at home. These are not good things. The Eurozone, the Swiss, Sweden and Denmark have tried negative policy rates ands it’s not clear there has been a great benefit. Just because you can do something doesn’t mean you should. Investors believe there is a reasonable chance Bank Rate will turn negative at some point in the next 12 months.
— to www.itv.com