BoE Signals Short Term Bounce Back but A Long Route to Full Recovery

  • Aug 07, 2020 BST
  • Team Kalkine
 BoE Signals Short Term Bounce Back but A Long Route to Full Recovery

Summary

  • The BOE monetary policy committee expects the economy to make a stronger comeback in the second and the third quarter of the year in comparison to its previous projections.
  • Earlier than the expected opening of the lockdown measures, and consumer spending picking up rapidly after the opening of lockdown has led to the optimism
  • Employment will be very slow to pick-up, and the people who have already lost their jobs will take longer than usual to find new jobs

 

The economic outlook of the Bank of England for the British economy came out on 6 August 2020, accompanied by the decision to hold rates steady. The report which in its previous edition had predicted a very gloomy picture for the rest of year has come as a surprise for many, who were expecting a much worse picture of the economy than has been painted by the central bank. The policymakers have now stated that the GDP is expected to shrink by 9.5 per cent in 2020 compared to the 14 per cent contraction expected in May. The sharper than expected recovery in some of the key industries like the housing construction industry and the retail industry has beaten many an estimate made by economists and financial institutions that is responsible for this upgrade. However, the central bank has also said in this report that this current state of recovery may be truncated because of the inherent structural faults that have cropped up, particularly the unemployment scenario in the country. It is to be noted here that the governments furloughing scheme is coming to an end in October this year, after which a major spike in unemployment rates is widely expected.

BOE’s current projections an upgrade over its previous predictions

The Bank of England (BOE) current economic outlook for the British economy is a major improvement of its earlier report presented in the month of May. Back then the central bank has forecast that the economy would shrink by 28 per cent for the second quarter of the year, and 14 per cent for the full year. However, in the 6 August report, the second quarter GDP slowdown is stated as 20 per cent while for the full year the GDP shrinkage is predicted at 9.5 per cent. There are not many tools available at this time in the hands of the central bank to promote growth, as interest rates are already at an extreme low. Given the deteriorated state the economy is in presently, the risk of the country getting into a liquidity trap would be very high. In fact, lowering of interest rates any further at this point of time would only deter banks from lending any further as their balance sheets are already under too much pressure. However, the non-interest rate monetary stimulus that has been extended by the government in conjunction with the central bank in March of this year has done a good job till now, and it is highly unlikely that there will be a rethink on withdrawing this any time soon.

BoE’s prediction on Jobs

The twin effects of the possible resurgence of the pandemic in the winter months and the withdrawal of the furloughing scheme could play spoilsport for the economy in the short as well as long run. But its impact on the employment situation in the country will be catastrophic. Given the uneven way the economy has been recovering in the past few months, the policymakers at BoE are of the opinion that output would return to pre-pandemic levels, not before the end of 2021. It directly implies that employment will be very slow to pick-up, and the people who have already lost their jobs will take longer than usual to find new jobs. The weak economic climate would also deter any new start-up activity or expansive activities with existing enterprises leaving new people joining the workforce high and dry.

However, the current assessment of the BOE on the unemployment situation in the country is not as bad as it had predicted in its May edition of the economic outlook. It now expects that most of the 9.7 million furloughed employees will be able to join back at work by the fourth quarter of the year and the unemployment rate peaking to 7.5 per cent. The report also stated that sectors which are consumer-facing and are subject to enhanced social distancing measures, like the hospitality sector, would be the ones to shed the most labour.   

The current state of the capital markets and what is to be expected for the rest of the year

The performance of the British capital markets during the rest of the year will be impacted by a combination of internal as well as external factors. The increasing inclusion of multinational corporations on the London Stock Exchange over the years has ensured that the impact of the domestic economic factors has a lesser impact on its performance.

The BoE economic outlook predicts the British economy to perform much poorly over the rest of the year compared to its European peers and many other important countries in Asia and Oceana region. Thus the London Stock Exchange performance is likely to remain cautious similar to the real sectors of the British economy.

The most probable outcome on the pandemic in the near future and outlook

While the risk of the resurgence of the pandemic in the winter months is highly probable, the work on the vaccine has also come a long way in the past few months. The AstraZeneca Oxford University vaccine should be available for mass inoculation by the month of September if no further hiccups in the clinical trial stages show up. If in the first couple of months of its availability, the country is able to vaccinate a majority of its population, then the economic situation of the country would be much better in the fourth quarter of the year.

The last quarter is usually the most important quarter for the economy as it is the holiday season and the period when most of the consumer spending happens. Now with some positive news earlier than expected on the vaccination front, strength in economic recovery may greet the British people this Christmas.

 

 


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