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Bank of England’s projection is making the news headlines this week as the central bank eyes the biggest annual slump in more than 300 years with the expected plunge of straight 14 percent in Britain’s economy in 2020. Based on illustrative scenario, the Bank of England also estimates unemployment to spike to nearly 9 percent- up from 4 percent at present- due to the outbreak of pandemic coronavirus that could be worse than the damages caused by the financial crisis.
Earlier the International Monetary Fund (IMF), the Office of the Budget Responsibility (OBR), and a host of other private and not for profit institutional economic thinktanks had also made similar observations about the British economy. The advent of the pandemic in the country is now the most damaging event to have happened in three centuries, which seems to be even worse than the Spanish flu, the World War I and the World War II. The country though has not lost as many lives during this pandemic as it had lost during any of the above three mentioned incidents but the way this event has paralyzed the country has definitely been unprecedented. Never before the country had the need to shut itself down for such an elongated period of time with no certainty for how long it would need to stay in place. There are many industries altogether which would see mass layoffs and many constituent companies going bankrupt, while several others finding it difficult to get back to their old operational levels any time soon. The pandemic till now has infected more than 200,000 people in the United Kingdom out of which nearly 30,000 have already succumbed to it.
The last time when the United Kingdom faced economic challenge of a magnitude to be called a crisis was when the US Sub prime crisis broke out and was immediately followed by the European sovereign debt crisis. At that time, the Bank of England had released a stimulus package that recapitalized the banks and was able to shield the British economy of much of the ill effects of a recession that could have ensued if such a measure would not have been taken. The current crisis, however, is a different beast altogether. The government is in a catch-22 positions , where it has to do the utmost to protect the lives of its citizens which can only come at the cost of shutting down the economy as long as is required. Opening up the economy without having a certain degree of control over the spread of the virus could very likely result in a second wave of an even severe outbreak, which could prove disastrous for the economy. Given the way the number of infections are increasing by the day, it would not be reasonable to say that the country is in any way near a peak. The dilemma before the British government and the Bank of England is that their resources only permit a lockdown for a finite period beyond that it will be extremely difficult to stop the economy from sliding down into a deep recession. Hence, they must open up the economy while the pandemic still continues and withstand all the risks that come associated with it.
Last month the office of the Budget responsibly had also come out with its own assessment of the state of the British economy. The office had stated that the British economy will shrink by nearly 35 percent in the April to June quarter this year and by nearly 13 percent for the full year 2020. Last month the IMF had also stated that the world economy could shrink by more than 3 percent because of the pandemic and that the United Kingdom would see a recession that would be worse than the 2008 financial crisis. Also on the labor front, several studies have revealed that the country would hit the worst unemployment numbers in years despite the state-backed wage subsidy schemes that has already witnessed 1.6 million people applying for unemployment benefits till the end of March.
This is the first time, however, when the Bank of England has come out with such an assessment. Its numbers though slightly different from what had been published before by other government bodies, but has accepted the harsh reality to see a crash of 25 percent in British economy in April to June quarter with whole economy for the year to shrink by at least 14 percent, the deepest recession for 300 years. The central bank also expects that unemployment in the county would touch nearly 9 percent because of the lockdown, yet it believes that the economy will make a strong comeback once the dust settles on the pandemic. The Bank further states in its assessment that the British economy will make a spectacular 15 percent recovery in 2021 if its assumptions on the containment of the virus infections turn out to be correct. However, despite these assessment, the Central Bank did not make any changes to its policy rates and kept it steady at 0.1 percent.
The Government along with the Bank of England have taken several measures to contain the adverse economic impact of the pandemic on the country. The government first came out with an employee furloughing scheme whereby it offered to pay nearly 80 percent salary of furloughed employees of small and medium businesses to reduce job losses due to lack of business activities. Then the government came out with a Coronavirus Business Interruption Loan Scheme (CBILS), where large companies could take state-backed loans from banks to pay off their expenses like salaries, rent and other operational expenses while reeling under the impact of pandemic. Soon after the launch of the programme it was found out that there would be many companies who would not be able to avail of the scheme due to various reasons, the government came to the rescue again and extended its furloughing scheme to these companies. In the final week of April, the government came back with yet another stimulus package called the ‘Bounce Back Loan Scheme’ whereby small businesses in the country would be eligible to apply for loans upto £50,000 online which under relaxed terms with no-interest and repayment liability for the first 12 months.
The UK government hopes that with these stimulus packages it would be able to cut down on a significant amount of economic losses that the country could face due to the pandemic. However, the vulnerability of the situation explains the importance of first containing the disease to have favorable outcomes.
