Downturn less severe than feared – Bank of England

Image copyright Dan Kitwood

The UK economy faces a less severe downturn but slower recovery from the coronavirus pandemic, according to the Bank of England.

It expects the economy to shrink by 9.5% in 2020.

While this would mark the biggest annual decline in 100 years, it compares with an initial estimate of a 14% contraction.

However, the Bank warned that the jobs market recovery would take longer as it held interest rates at 0.1%.

In its first official forecast since the pandemic hit, the Bank said the recovery had been “earlier and more rapid” than it had assumed in May, reflecting a faster easing of lockdown restrictions.

It said spending on clothing and household furnishings was now back to pre-Covid levels, while consumers have carried on spending more on food and energy than before the lockdown.

However, it said leisure spending and business investment remained subdued, which would weigh on the recovery.

Slower recovery

The Bank said the outlook for growth was “unusually uncertain”, It expects the UK economy to grow by 9% in 2021, and 3.5% in 2022, with the economy expected to get back to its pre-Covid size at the end of 2021.

This compares with growth estimates of 15% and 3% respectively, in a scenario set out in May.

Unemployment is expected to rise “materially” to 7.5% at the end of this year as government-funded support schemes come to an end.

Average earnings across the economy are expected to shrink for the first time since the financial crisis.

The Bank’s latest forecasts are based on the continued easing of nationwide lockdown measures and a smooth transition to a new EU free trade agreement at the start of 2021.