The UK economy is heading for its worst crash in more than 300 years because of the coronavirus pandemic, according to a new forecast from the Bank of England.
The central bank said Thursday that the British economy could shrink by 14% this year. That would be the biggest annual contraction since a decline of 15% in 1706, based on the bank’s own best estimate of historical data.
Governor Andrew Bailey said it would respond as necessary to support the economy as the coronavirus threat evolves, but stopped short of announcing any new stimulus measures.
In a report that examined the impact of the pandemic, the Bank of England said that GDP contracted by 3% in the first quarter of this year and would fall by as much as 25% in the second quarter, leaving the economy about 30% smaller than it was at the end of 2019. Unemployment is expected to increase to 9%.
The central bank expects a swift economic recovery in 2021, but it cautioned that its forecast, which assumes a gradual easing of social distancing measures and “very significant” monetary and fiscal stimulus, depends on the “evolution of the pandemic, and how governments, households and businesses respond.”
And the bank warned that it’s more likely to have underestimated the scale of the economic crash than to have overstated it.
Economists at Commerzbank said that they expect more economic scarring and a slower recovery. Historic examples suggest there will be a more permanent loss of output, they said, and more persistent unemployment.
“Current conditions are unprecedented in our lifetime and all forecasters are struggling to make out where the economy stands now, never mind what happens in future. But it is clear that the next few months are going to produce some of the biggest output falls on record,” said Commerzbank economist Peter Dixon.
Britain has more than 200,000 confirmed coronavirus cases, and more than 30,000 people have died from the disease. There has been widespread speculation that the government is preparing to ease social distancing restrictions in place since late March as early as Monday, but a government minister said Thursday that a decision has not yet been made.
“We haven’t made any final decisions on these issues yet,” Brandon Lewis told the BBC. “I would just say to people to not get too carried away with what we may be reading.”
Some European countries have taken tentative steps to reopen their economies as the region is slammed by what EU officials describe as the worst economic shock since the Great Depression. The EU economy will shrink by a record 7.5% this year, the European Commission warned this week, and the drop could be even more precipitous across the 19 countries that use the euro.
The Bank of England has already taken some steps to counter the economic shock caused by weeks of lockdown measures and lost production, slashing interest rates to a record low in March and launching a £200 billion ($248 billion) bond buying program.
The UK government has meanwhile launched a rescue package that includes tax relief for businesses totaling £30 billion ($37 billion) and interest-free loans for up to 12 months. The government is also paying salaries for more than 6 million workers for an initial period of three months.
More action is likely to be taken in the coming months. Two members of the central bank’s monetary policy committee voted to pump another £100 billion ($124 billion) into the stimulus program, and outside economists expect other members to agree once the situation becomes clearer.
If the coronavirus continues to spread, and the government is forced to extend or reintroduce lockdowns, much more than £100 billion could be needed.
“The bank may end up going much further,” said researchers at Capital Economics.