Back in August the Bank of England was relatively chipper about the economy. It was the month of “Eat out to help out”, sectors that had been locked down as a result of the pandemic were opening up and growth was exceeding expectations.
Three months on, the outlook – courtesy of a second wave of Covid-19 – has become much darker. Instead of the 5.5% economic expansion it had been pencilling in for the final three months of 2020 Threadneedle Street is assuming a 2% decline.
That’s a much smaller fall than the 20% contraction in the spring, but as the Bank’s governor, Andrew Bailey, pointed out, the economy is already 9% smaller than it was at the end of last year. A 2% drop still represents a chunky fall: the 11% cumulative decline over the course of 2020 is double that seen during the financial crisis of 2008-09.
It could eventually be worse than that, because the Bank is assuming the national lockdown in England ends as planned on December and that thereafter restrictions return to the level of severity of those in place in mid-October, and remain there until the end of March 2021.
Technically speaking, Britain will be spared a double-dip recession because that requires two successive quarters of negative growth, and a modest recovery in output is predicted for the first three months of 2021 as restrictions are eased somewhat.
It will certainly feel like a recession, though, and with risks firmly skewed to the downside, the Bank has responded with the only meaningful weapon currently at its disposal: an increase of £150bn in its quantitative easing programme. This will inject money into the economy through the purchase of government bonds – or gilts – from the financial markets.
The Bank is doing technical work on the feasibility of negative interest rates but these seem some way off even assuming the nine-strong monetary policy committee agrees to use them. Bailey said there was no point even thinking about negative rates unless it was sure IT systems at high street banks wouldn’t blow up.
It is hoped the extra dollop of QE will help lift inflation back towards its 2% target and forestall any turbulence in the markets as a result of the tougher new restrictions. The markets are braced for more asset purchases next year. Clearly, though, everything – both for the Bank and the Treasury – is now about damage limitation: preventing a massive surge in unemployment and the long-term scarring that might result.