The central bank’s latest forecasts are unexpectedly more optimistic, but the economy remains vulnerable and the future uncertain.
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Let’s start with the good news.
And it might sound a little odd, given we’re facing a deep recession and a sharp rise in unemployment, to be talking about good news.
But still, the Bank of England’s latest forecasts for the economy over the coming year or two are unexpectedly more optimistic than most of the other projections we’ve seen from major economic institutions.
Rather than expecting unemployment to rise to three and a half million, as per the latest central scenario from the Office for Budget Responsibility, the Bank thinks it may peak at two and a half million.
Rather than expecting 1980s levels of joblessness, the Bank thinks the toll may not exceed the levels seen in the financial crisis.
Rather than expecting a very slow recovery from the initial dive in national income, the Bank thinks after around a 20% fall in the face of COVID-19, we are now in the midst of an 18% bounce back.
Is that “so far, so V”, as the Bank’s chief economist has put it? Well, yes and no.
And that’s where the less good news starts.
For while the Bank thinks the economy will get back to its pre-crisis size by the end of next year (earlier than some expect), it still thinks there will be permanent long-term “scarring” from this experience, with the economy about 1.5% smaller in the medium term than it expected before this crisis struck.
To put this into perspective, the economic hit we are going through completely swamps what was previously considered the main economic risk up until COVID-19 struck – a no-deal Brexit.
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For the first time, the Bank has incorporated that risk into the so-called fan charts that depict its projections, yet insiders say the impact of a WTO (World Trade Organisation) Brexit is a “wrinkle” in comparison with the doubt over our post-COVID recovery.
And make no mistake, the economy is more vulnerable than it has been for many years.
According to another striking Bank statistic, the cash flow deficit facing businesses across the country is currently around £200bn.
To put that into perspective the “normal” deficit is around £20-30bn.
And while the Bank has produced forecasts rather than vague scenarios – a nuanced but important point for economists – the scale of uncertainty hanging over them is far greater than usual.
Amid all this uncertainty it’s hardly a surprise that the Bank has chosen to hold steady with its actual economic levers, leaving interest rates and quantitative easing unchanged this month.
While some suspect the Bank might be edging its way towards negative interest rates, that is not on the menu yet.
But as the past few months has taught us, anyone who thinks they can predict the future is having you on.