Bank of England: UK economy is likely to shrink 14% amid coronavirus pandemic

Bank of England forecast regarding economy to shrink by 14% this year, which was noted as the biggest fall in 300 years. In the Opening Statement by the Governor and Andrew Bailey, the economic outlook was described, highlighting that indicators of financial market uncertainty is on the high level and the commodity prices have fallen sharply.

Although the impact COVID-19 has on UK economy was stated as likely to weaken materially over the coming months, even though the magnitude of the economic shock is highly uncertain.

In the article in Bloomberg by Jill Ward and Francine Lacqua on May 7, the statement by Bank of England Governor Andrew Bailey said: “Bank of England Governor Andrew Bailey made clear that policy makers could expand monetary stimulus as soon as next month as the U.K. faces potentially the worst economic slump in Europe.” Moreover, his pledge to “act as necessary” was mentioned as it suggests that bond buying could be expanded for as long as needed.  In the forecast it is expected that the gross domestic product could shrink by 25% in the second quarter. It also adds that the unemployment will more than double to 9%.

Andrew Bailey, the bank’s governor, said: “The scale of the shock and the measures necessary to protect public health mean a significant loss of economic output has been inevitable in the near term.” He also said that Bank would have to respond to meet the needs of people, if there would be a second wave of infections to occur.

On Guardian website, in the Business live Eurozone news section, there was article published by Graeme Wearden noting that despite the Bank of England’s gloomy prognosis for this year, the stock and pound are little higher this morning saying:

“That’s partly because the BoE expects the economy to grow by 15% in 2021, after a 14% contraction this year [although arithmetically that still leaves the economy smaller]. China has also cheered the markets, by reporting exports rose 3.5% in April on a year earlier. Economists had expected a fall of around 15%. So, sterling is up 0.2% against the US dollar at $1.2366, while the FTSE 100 index is 48 points higher at 5902.”

Moreover, in the Opening Statement by the Governor and Andrew Bailey from March 2020, the disruption caused by COVID-19 was said as to be temporary. It describes that: “Such economic disruption should have lower impact on the core banking system than recent stress tests run by the Bank have shown the system can withstand.” Banks would be able to continue supporting businesses and households and will take necessary steps to support the UK economy. Article states their aim is to ensure the “the strength of our financial system can be directed to where it is most needed in months ahead.”

On 16th of April the lockdown measures were announced to remain in place until May 7th, when they are going to be reviewed. Five tests must be met in order to consider easing the lockdown for example data showing rate of infection decreasing to ‘manageable’ levels or that supply of test and personal protective equipment can meet future demand. On 10th May Boris Johnson will be announcing the government plan on how the country might lift the lockdown that have paralysed UK economy.

By Julita Waleskiewicz

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