Updated: May 8, 2020
The Bank of England (BoE) has forecast that the UK economy could shrink by 14% this year due to the coronavirus pandemic, pushing it towards its deepest recession.
Scenarios drawn up by the bank to illustrate the economic impact said Covid-19 was "dramatically reducing jobs and incomes in the UK".
BoE said that the spread of Covid-19 and the measures to contain it are having a significant impact on the UK and many countries around the world. Activity has fallen sharply since the beginning of the year and unemployment has risen at an incredible rate.
Survey indicators such as the output components of purchase management index (PMIs) have fallen to record‑low levels since the start of the year, and suggest that many countries have experienced extremely sharp falls in activity.
The bank predicts that GDP will contract by 25% in the current quarter before recovering later in the year.
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.
It is also maintaining its plan of buying another £200bn of government bonds to cushion the economy, although two committee members wanted to boost this quantitative easing stimulus package by another £100bn,
The bank said that the timeliest indicators of UK demand have generally stabilised at very low levels in recent weeks, after unprecedented falls during late March and early April. It added that payments data point to a reduction in the level of household consumption of approximately 30%.
According to the Bank’s Decision Maker Panel, companies’ sales are expected to be around 45% lower than normal in 2020 and business investment 50% lower. Meanwhile, there has been widespread take-up of the Coronavirus Job Retention Scheme. Nonetheless, sharp increases in benefit claims are relatively consistent with a pronounced rise in the unemployment rate.
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 coronavirus crisis. Their analysis is based on the assumption that job losses and shrinking pay packets will continue to weigh on the recovery, with British families remaining cautious about shopping and socialising for at least another year.
Average weekly earnings are expected to shrink by 2% this year, reflecting the fall in wages for furloughed workers. The bank said sharp increases in benefit claims are "consistent with a pronounced rise in the unemployment rate", which is expected to climb above 9% this year, from the current rate of 4%.