BoE Warns UK Set To Enter Worst Recession For 300 Years (#GotBitcoin?)
Central bank predicts 30 per cent drop in output in first half of 2020 but opts against new stimulus. BoE Warns UK Set To Enter Worst Recession For 300 Years (#GotBitcoin?)
The Bank of England has forecast that the coronavirus crisis will push the UK economy into its deepest recession in 300 years, with output plunging almost 30 per cent in the first half of the year, but it decided not to launch a new stimulus.
In its monetary policy report, the central bank presented rough and ready predictions for the economy, suggesting that output would slip 3 per cent in the first quarter followed by a further 25 per cent fall in the second. This would mean an almost 30 per cent drop overall in the first half of 2020, the fastest and deepest recession since the “great frost” in 1709.
The economic projections came with a warning to Britain’s banks that if they tried to stem losses by restricting lending, they would make the situation worse.
Andrew Bailey, the BoE governor, said a failure to lend would create a vicious circle of more bankruptcies and higher losses on loans that would come back to hit the banks themselves.
Speaking to journalists, Mr Bailey said: “The better path for banks is to keep lending . . . we keep banging this message home. If the system [ensures a good supply of loans], we’ll get a better outcome.”
Commercial banks responded that they were committed to lending through the crisis. Alison Rose, NatWest chief executive, said the bank was “committed to providing our customers, communities and colleagues with the support they need”.
Speaking at Barclays’ annual general meeting on Thursday, Jes Staley, chief executive, pledged that his bank would emerge with “a reputation as having stood with the citizens of Great Britain in this time of crisis”.
António Horta-Osório, chief executive of Lloyds Banking Group, last week said the bank was working with government and regulators “to ensure that we play our part in supporting our customers and the UK economy”.
But the BoE cautioned that, even with adequate lending, the economy was bound to take a big hit; household spending has dropped about 30 per cent since early March.
The central bank forecast that the UK’s unemployment rate was likely to rise to 9 per cent in 2021, even with the government’s job retention scheme protecting many employees from being laid off. That would mean a higher rate of joblessness than after the 2008-09 financial crisis.
The central bank also forecast that inflation would dip to 0.5 per cent in 2021, before returning to the 2 per cent target the following year.
In contrast to the gloomy assessment of the current economic position, the longer-term economic projections were more upbeat, with the BoE expecting “only limited scarring to the economy”.
The bank’s back-of-the-envelope scenarios assumed long-term damage to the economy would be only 1.5 per cent of gross domestic product and would come from missed business investment in 2020. Otherwise it predicted the economy would bounce back in a V-shaped recovery.
Mr Bailey said the economic rebound was likely to happen “much more rapidly than the pullback from the global financial crisis”.
The BoE said it stood ready to put more money into the economy should it be needed and had further meetings planned for June — before the £200bn it pledged in March to support economic activity by buying government bonds was likely to run dry.
Mr Bailey defended the decision not to take more immediate action, saying the measures announced in March had not been exhausted. “It’s a very aggressive [asset] purchasing programme . . . [and] we have made a very clear commitment to do what it takes to support the economy consistent with [meeting] the inflation target.”
Not all Monetary Policy Committee members supported the majority decision. Two of the nine members, Jonathan Haskel and Michael Saunders, voted to increase quantitative easing by another £100bn immediately, seeking more stimulus to prevent greater scarring of the economy later.
All MPC members agreed that more stimulus might be needed in future. In the minutes, the committee said: “For all members of this group, the prospective weakness in employment and inflation, and downside risks around aspects of the medium-term outlook, might necessitate further monetary policy action.”
Along with most economists, Paul Dales, chief UK economist at Capital Economics, said he thought the central bank was signalling that “more QE is coming, if not in June, then in August”.
The BoE also undertook an exercise to test whether the financial system could cope with the expected once-in-a-century recession.
It assessed that banks would lose less money than in its latest stress test and concluded that “the core banking system has capital buffers more than sufficient to absorb losses”.
It did, however, stress the pandemic would severely hit corporate cash flow. It said that while UK companies normally operate with a cash flow deficit of £80bn, the crisis would raise that to £190bn. Government support would plug some of the gap, but there remained a £60bn additional deficit that banks would need to cover to stop viable businesses from going under.
In the financial stability section of its report, the central bank warned that if high-street lenders failed to provide credit to their business customers, they might see a short-term benefit in reduced losses, but would cause more companies to fail and unemployment to rise another 2 percentage points, ultimately leading to larger losses.
U.K. Economy Shrinks by More Than Any Other Rich Country
GDP declined by more than 20% in the second quarter, equivalent to an annualized rate of nearly 60%.
The U.K. recorded a steeper second-quarter contraction than its peers, suffering the worst economic hit from the coronavirus in Europe as well as reporting the highest death toll there.
The U.K.’s economy is already recovering as restrictions on daily life ease and workers trickle back to factories and offices, but Bank of England officials warn that it could take until the end of 2021 to regain the ground lost during the pandemic.
The country’s gross domestic product shrank 20.4% in the second quarter, equivalent to an annualized rate of 59.8%, its statistics agency said Wednesday. In the same period, U.S. and German output declined by around 10%, while Italy lost 12%, France 14% and Spain 19%.
“It’s been a rough few months,” said Richard Swart, global sales and quality director at Berger Global, a northern England-based unit of Germany’s Ringmetall AG that manufactures rings used to seal container drums.
Sales in May and June fell between 20% and 40% depending on the industry being supplied, he said. Sales have since improved but remain sporadic, a sign of continuing uncertainty among customers, Mr. Swart added.
“Everybody clings to the hope that there will be a vaccine, that’s the ultimate fix,” he said.
The outsize hit reflects the timing and duration of the U.K.’s nationwide lockdown. Britain locked down in late March, weeks after comparable European countries, and only gradually began easing restrictions late May. That meant the economy was shut throughout most of the second quarter, whereas Germany and other neighbors had already begun to reopen.
Another factor is the makeup of its economy. Compared with peers, a larger share of the U.K. economy is devoted to activities that require close personal contact, which have been especially hit by measures to halt the spread of Covid-19.
The Bank of England calculates that spending on such activities, including going to the cinema or theater, eating out or attending live sporting events, represents around 13% of total output in Britain, compared with around 11% in the U.S. and 10% in the euro area.
Data on Wednesday showed household spending shrank 23.1% in the second quarter compared with the first, while business investment fell by almost a third. Manufacturing and services output both fell by one-fifth as factories idled and businesses closed.
Steve Clift, director of Café Azzurro Events Ltd., said the pandemic has all but vaporized the revenue he would have expected to bring in this year. The Solihull, England-based firm supplies coffee and hospitality services across Europe to conferences and events, all of which were canceled.
Business “fell off a cliff,” he said. He is hoping bookings tentatively scheduled for the year-end will help him claw back some of the first-half losses.
Economic activity picked up in June as lockdown measures eased, official figures showed. The economy recorded growth of 8.7% on the month, led by expansions in hospitality and construction.
Separate data Wednesday showed industrial output in the 19-nation eurozone rose strongly for the second straight month in June. Production at factories, utilities and mines was 9.1% higher than in May, though output remained 11% less than in February, before lockdowns became widespread.
Amid the downturn, the U.K. has, in common with other European countries, spent big to try to keep workers on payrolls. Around 730,000 jobs have been lost since March, according to data Tuesday, but some 9.6 million employees who might have lost their jobs were instead on a government-backed furlough program.
That program is due to end in October. Treasury chief Rishi Sunak warned Britons on Wednesday to brace for further job losses this fall.
The U.K. has recorded 46,000 confirmed Covid-19 related deaths, the highest tally in Europe and the fourth highest in the world after the U.S., Brazil and Mexico. That is equivalent to almost 700 deaths per million residents, more than Germany, France, Spain, Italy or, on that per capita basis, the U.S.
Public-health experts say the high toll reflects factors including an aging and diverse population, as older people and some ethnic groups are more vulnerable to severe illness. Britain also has higher rates of obesity, diabetes and other illnesses tied to an increased risk of death than its European neighbors.
Some also pinpoint errors in policy, such as waiting too long to lock down the economy and slowness in rolling out an effective test, trace and isolate program to hunt down new cases and stop the virus spreading.
“We responded really late, and in a chaotic manner,” said Linda Bauld, professor of public health at the University of Edinburgh. The U.K. government has repeatedly defended its response, saying it acted swiftly and in line with evolving scientific advice.
Prime Minister Boris Johnson’s Conservative Party continues to hold a comfortable lead over the rival Labour Party in the polls. There are two main reasons for this: Firstly, voters think that Mr. Johnson’s party can better manage the economy; secondly, voters are proving forgiving over the government’s handling of the pandemic.
“They are willing to give them the benefit of the doubt given the circumstances,” said Chris Curtis from pollster YouGov.
Still, the economy has now supplanted health care as the No. 1 issue for voters in the U.K., according to YouGov, meaning Mr. Johnson’s political fortunes will depend on how quickly the economy recovers and how well the labor market holds up when employment-support programs end in the fall.
Another wrinkle: The central bank’s prediction for a protracted recovery assumes that free-trade talks with the European Union, due to wrap up this fall, conclude with a deal that smooths the final step of the U.K.’s departure from the bloc.
Britain officially left the bloc in January but remains a de facto member state until the end of the year. Failure to reach a deal risks disrupting trade with its biggest trading partner, potentially setting back any post-pandemic recovery.
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