Bank of England warns of sharpest recession on record

The Bank of England has warned that the UK economy is heading towards its sharpest recession on record.

The impact of coronavirus meant the economy would shrink 14% this year, based on the lockdown being relaxed in June.

Scenarios drawn up by the Bank to illustrate the economic impact said Covid-19 was “dramatically reducing jobs and incomes in the UK”.

Bank governor Andrew Bailey told the BBC there would be no quick return to normality.

He described the downturn as “unprecedented”, and said consumers would remain cautious even when lockdown restrictions are lifted.

Mr Bailey said: “Not all of the economic activity comes back. There’s quite a sharp recovery. But we’ve also factored that people will be cautious of their own choice.

“They don’t re-engage fully, and so it’s really only until next summer that activity comes fully back.”

Also on Thursday, policymakers voted unanimously to keep interest rates at a record low of 0.1%. However, the Monetary Policy Committee (MPC) that sets interest rates was split on whether to inject more stimulus into the economy.

Two of its nine members voted to increase the latest round of quantitative easing by £100bn to £300bn.

The Bank’s analysis, published on Thursday, was based on the assumption that social distancing measures are gradually phased out between June and September.

Its latest Monetary Policy Report showed the UK economy plunging into its first recession in more than a decade. The economy shrinks by 3% in the first quarter of 2020, followed by an unprecedented 25% decline in the three months to June.

This would push the UK into a technical recession, defined as two consecutive quarters of economic decline.

The Bank said the housing market had come to a standstill, while consumer spending had dropped by 30% in recent weeks.

For the year as a whole, the economy is expected to contract by 14%. This would be the biggest annual decline on record, according to Office for National Statistics (ONS) data dating back to 1949.

It would also be the sharpest annual contraction since 1706, according to reconstructed Bank of England data stretching back to the 18th Century.

While UK growth is expected to rebound in 2021 to 15%, the size of the economy is not expected to get back to its pre-virus peak until the middle of next year.

The UK government is expected to start easing lockdown restrictions next week.

The Bank stressed that the outlook for the economy was “unusually uncertain” at present and would depend on how households and businesses responded to the pandemic.

It also assumes:

The government’s jobs retention scheme covering 80% of wages is phased out with the lockdown.
Companies stop or scale back their operations for some time.

Cautious consumers voluntarily maintain social distancing until mid-2021.