The Bank of England has warned the UK economy could contract by close to 30 per cent this summer.
In its first official outlook since the coronavirus pandemic began, the bank cautioned over a “very sharp” fall in GDP over the first half and a “substantial” rise in unemployment as it left interest rates at a record low of 0.1 per cent.
The bank’s “illustrative scenario” shows an unprecedented fall in economic output: around 3 per cent in the first three months of 2020 and a further 25 per cent in the second quarter.
It suggests GDP could fall 14 per cent for 2020 as a whole – the deepest annual fall since 1706. But the bank said the sharp fall in activity should be temporary and that activity should “pick up relatively rapidly” once lockdown measures are eased.
The jobless rate could surpass 8 per cent, the bank said. However, it warned that forecasting the economic outlook this year was fraught with uncertainty.
The bank added: “The spread of Covid-19 and the measures to contain it are having a significant impact on the United Kingdom and many countries around the world.
“Activity has fallen sharply since the beginning of the year and unemployment has risen markedly.
“UK households entered this period of economic disruption in a stronger position than they were before the 2008 financial crisis.
Policy responses to the virus from the government will provide substantial support to households, but the shrinking economy will put pressure on some households’ finances, the bank said.
“We are vigilant to risks that could emerge once payment holiday measures end, including borrowers seeking to refinance in the coming months.”
It came after the former chancellor Alistair Darling warned that the recession we are now entering will be “much, much worse” than the financial crisis of 2008.
A 14 per cent hit to the economy this year is equivalent to around £300bn, or £9,000 for every family in Britain, according to the Resolution Foundation’s calculations. The think tank said the figures show that the bank and government were right to have protected households as much as possible with policies such as the job retention scheme.
Forward-looking indicators point to an unprecedented fall in economic activity. The construction industry purchasing managers’ index collapsed from 39.3 in March to 8.2 in April – by far the worst reading since the survey began in 1997.
The picture for services, which make up more than three quarters of the economy, is similarly bleak, with the PMI reading slumping to 13.4. Any number below 50 indicates the sector is shrinking.
Almost four in five service businesses reported activity fell in April. Much of the decline was expected because restaurants, bars and other service businesses were forced to shut down on 23 March to slow the spread of Covid-19.
The poll indicated that the UK economy shrank 7 per cent in the three months to the end of April, but the true decline is likely to be worse as the PMIs do not include retailers or the self-employed.
The bank’s Monetary Policy Committee (MPC) voted unanimously to hold rates at 0.1 per cent on Thursday and kept its quantitative easing (QE) programme to boost the economy unchanged at £645bn.
Two MPC members voted to increase QE by another £100bn, a move that would provide a boost to the economy.
Boris Johnson’s official spokesperson said the government’s measures had helped to soften the economic blow of Covid-19 and the loackdown.
He said: “Our measures are working, with the 700,000 grants and loans issued to businesses, over half a million businesses registered for furlough and hundreds of thousands getting business rate and VAT relief.”
“As the prime minister and his colleagues have set out previously, we fully understand the huge impact which the measures we are taking are having on the economy, but what would be worse for the economy would be to ease these measures too soon and have a second spike.
“That is not only the view of the government, it’s the view of the governor of the Bank of England.”
The government is coming under pressure from some critics to “open up” the economy, despite the UK now having the worst death toll in Europe. However, it is not yet clear how companies can keep staff safe when they go back to work. Ministers were heavily criticised on Wednesday for the government’s “wholly inadequate” proposals to protect staff returning to work when coronavirus restrictions are lifted.
Labour’s shadow employment secretary, Andy McDonald, tabled an urgent question in the House of Commons calling on ministers to put in place proper protections to keep employees safe from Covid-19.
“No worker should have their lives put at risk simply for going to work,” Mr McDonald said, adding that trade unions had been given just 12 hours to review the government’s plans for worker safety.