The spread of Covid-19 and the public health measures taken to contain it have led to a dramatic drop in economic activity around the world.
Many countries, including the UK, introduced social distancing. Schools and workplaces were closed, travel restricted and people instructed to stay at home.
In the UK, about one in five companies report that they have temporarily closed or paused trading. Close to one in four have seen their turnover halve. Payments data suggest household spending is down by around a quarter.
Official estimates suggest that UK economic output contracted by almost 6% in March as lockdown measures were introduced. It is likely to have fallen considerably further in April as those measures remained in place.
As activity has fallen in the UK, the number of people in work has dropped sharply. Claims for universal credit have surged, suggesting the jobless rate has more than doubled from around 4% at the start of the year to about 10% now. In addition, roughly a quarter of the UK workforce has been furloughed. The consumer price index inflation declined to 0.8% in April, well below the monetary policy committee’s 2% target.
Policymakers in the UK and abroad are responding to the pandemic by providing exceptional monetary and fiscal support. We have a common aim – to support households and businesses through the disruption and minimise any longer-term consequences.
The Bank’s policy committees have taken a range of actions since the onset of the pandemic in support of this goal.
• The MPC has cut the Bank rate to a historic low of 0.1% and expanded its asset purchase programme by £200bn.
• The financial policy and prudential regulation committees are supporting the ability of banks and building societies to provide credit by temporarily allowing them to hold lower financial buffers, called capital, for each £1 they lend. Our tests of the major UK banks show they are strong enough to continue lending. Doing so will support the economy and limit their own losses.
We are now entering a second phase of the pandemic. Social distancing measures have begun to be relaxed. As a result, some companies will be able to resume working.
The Bank is monitoring a wide range of data to give us a timely read on the economy during this phase. This includes high-frequency indicators – such as the number of journeys by train, plane and automobile, measures of retail footfall, and internet searches for hotel and restaurant bookings – as well as card payments data and new weekly surveys of businesses and households.
We have seen some increase in road travel since social distancing measures were eased earlier this month. Most other indicators remain at subdued levels – most likely because it is too soon to expect to see any meaningful impact. However, it is also possible that the pace at which activity recovers will be limited by continued caution among households and businesses even as official social distancing measures are relaxed.
No one can be sure exactly how the pandemic will unfold. There are reasons to believe that economic activity will return at a faster pace than in many past recessions, but this depends on how the measures continue to be eased, what degree of natural caution is shown by people, and how much longer-term damage is done to the economy. The risks are undoubtedly on the downside for a longer and harder recovery.
The Bank has taken unprecedented actions in terms of their scale and speed. I believe these actions are working. At a time when a sharp increase in borrowing, by firms and the government, is needed to support the wellbeing of people, we have been able to keep the effective cost of borrowing down, which is essential to support the economy and meet our target for inflation. It can only be achieved because the Bank is an effective independent central bank, and in no sense has that independence been put on hold.
We have signalled that we stand ready to do more within the framework of policies we have used to date. And, in view of the risks we face, it is, of course, right that we consider what further options, such as cutting interest rates into unprecedented territory, might be available in the future. But it is also important that we consider very carefully the issues that such choices would give rise to.
The Bank stands ready to do whatever we can to support UK households and businesses during this period of economic disruption and get through this together. This is our duty.
• Andrew Bailey is governor of the Bank of England