Bank of England warns UK economy could shrink 14% in 2020 amid Covid-19 downturn – business live

It’s been a busy morning for telecoms news too.

Cable operator Virgin Media and mobile network O2 are merging, to create a £31bn “national champion” to challenge BT and Sky in the UK.

BT has also been busy – taking a £95m charge due to Covid-19 losses, and suspending its dividend to fund super-high speed broadband networks and 5G mobile.

Here’s Anna Stewart of CNN on the Bank of England’s forecasts:

London’s Evening Standard points out that the Covid-19 slump will be three times as severe as after the financial crisis of 2008.

Hopefully, though, the rebound will be much faster. Especially if we avoid any growth-weakening austerity, something the Standard’s editor knows a lot about…

Covid-19 lockdowns has already pushed British Airway’s parent company into the red.

My colleague Jasper Jolly explains:

British Airways owner International Airlines Group made a £1.5bn loss in the first three months of the year, as chief executive Willie Walsh said it would take three years for passenger demand to recover to pre-pandemic levels.

IAG has halted 94% of its flights in response to travel restrictions during the coronavirus pandemic, causing it to bleed cash. Last week, British Airways set out plans to make up to 12,000 of its staff redundant because of the global collapse in air travel.

Walsh will stay on as chief executive of IAG until 24 September, the airlines group announced, having previously agreed to delay his retirement to help steer it through the Covid-19 crisis. He had been due to retire in March.

Losses after tax at IAG surged to €1.68bn (£1.47bn) during the first quarter, compared with a profit of €70m in 2019, it told the stock market on Thursday. That loss included a €1.3bn charge as fuel and currency hedges became worthless.

Despite the Bank of England’s gloomy prognosis for this year, stocks and the pound are a little higher this morning.

That’s partly because the BoE expects the economy to grow by 15% in 2021, after a 14% contraction this year [although arithmetically that still leaves the economy smaller]

China has also cheered the markets, by reporting exports rose 3.5% in April on a year earlier. Economists had expected a fall of around 15%.

So, sterling is up 0.2% against the US dollar at $1.2366, while the FTSE 100 index is 48 points higher at 5902.

The Bank of England’s new governor, Andrew Bailey, has hinted that the BoE could expand its stimulus programme at its next meeting in June.

Bloomberg’s Jill Ward has the details:

Two of the BOE’s nine policy makers wanted to immediately increase bond purchases — the main policy tool now that the key interest rate is near zero — by 100 billion pounds ($124 billion) in a decision announced early Thursday. The rest agreed downside risks “might necessitate further monetary policy action.”

Bailey, who earlier pledged “total and unwavering commitment” to safeguard the economy during the coronavirus crisis, told reporters that the fact no action was taken this time doesn’t rule out a response soon.

“It’s about what is the appropriate response and what information, news, we think we’re going to get in the quite near future,” he said. “It would be slightly overstating it to say that there’s a bunch of us will never do any more and a couple of people who will.”

Trade unions are urging the UK government not to make the economic downturn worse by turning off its furlough scheme too quickly.

The TUC says that today’s statistics showing that two-thirds of firms have tapped the Jobs Retention scheme shows it is vital.

Hat-tip to Ben Chu of the Independent, for showing just how grim the Bank of England’s forecasts are:

Just in: nearly a quarter of UK firms have temporarily closed due to the pandemic, and two-thirds are furloughing some staff.

That’s according to the Office for National Statistics. It just reported that 23% of businesses who responded to its latest survey said they had “temporarily closed or paused trading” last month.

It adds:

• Of businesses that responded to our fortnightly survey for the period 6 April to 19 April 2020, the main sectors reporting they had temporarily ceased trading were accommodation and food service activities (81%) and arts, entertainment and recreation (80%).
• 67% of responding businesses had applied for the Coronavirus Job Retention Scheme (CJRS), with 28% of the workforce in these businesses being furloughed.

One word of caution –only 35% of the 17,623 businesses contacted by the ONS responded, but the picture is still pretty clear:

The Bank of England has also shown how its scenario compare to City economists’ forecasts — where the range is rather, er, broad:

The key message from the Bank of England today is that activity in the UK has fallen sharply, and is going to continue to plunge during this quarter.

Explaining why it thinks the UK will shrink 14% this year, it says:

Official data are sparse at this stage, but high‑frequency indicators suggest that consumer spending has fallen steeply since March. In large part, that reflects the impact of both enforced and voluntary social distancing, with some additional drag from lower incomes and confidence about the outlook. In those areas most affected, such as tourism and eating out, indicators including aircraft departures and data on the number of seated diners at restaurants suggest that spending has all but come to a halt.

The closure of businesses and widespread moves to working from home have reduced the number of journeys by car and public transport substantially. In addition, spending on many durables is likely to have been delayed. One area that has proved stronger is spending on food, as households substitute spending at supermarkets for eating out. Nevertheless, consumer spending in aggregate has fallen very significantly. In 2020 Q2, it is expected to be almost 30% lower than in 2019 Q4.

These three charts from today’s Monetary Policy Report shows how the UK economy has already weakened:

There are also signs that UK house prices are starting to slide, amid the lockdown.

Halifax has reported that prices fell by 0.6% in April, on top of a 0.3% dip in March:

The Covid-19 crisis has prompted Norway’s central bank to slash its interest rates to zero.

In a surprise move, the Norges Banks just lowered its key borrowing rate from 0.25% to 0.0%, a record low.

It also slashed its economic forecasts, although not as sharply as the Bank of England.

Reuters has the details:

Norges Bank now predicts the mainland economy, which excludes oil and gas output, will contract by 5.2% in 2020, down from a March 13 forecast of 0.4% growth. It expects growth of 3.0% in 2021, up from 1.3% seen earlier.

My colleague Richard Partington writes that the Bank of England has sounded the alarm about the slump in the UK economy this year:

The Bank of England has warned the British economy could shrink by 25% this spring and unemployment more than double as the coronavirus pandemic brings the country to an effective standstill.

Leaving interest rates on hold as the economic crisis unfolds, the central bank said economic activity across the country had fallen sharply since the onset of the global health emergency and the lockdown measures used to contain its spread.

Sounding the alarm over the mounting damage to the economy during the coronavirus outbreak, the Bank said GDP could shrink by 14% for 2020 as a whole.

Threadneedle Street’s nine-member monetary policy committee (MPC) voted unanimously to keep interest rates on hold at 0.1%, the lowest level in the bank’s 325-year history, after using two emergency cuts in March at the onset of the Covid emergency in Britain.

However, in a reflection of the scale of the economic shock, the rate-setting panel was split over increasing the Bank’s £645bn quantitative easing stimulus package, with two members voting for an immediate £100bn increase.

Here’s his full story:

The Resolution Foundation think tank is concerned that the Bank of England predicts such a sharp jump in unemployment, and only a slow recovery in the labour market:

That 14 per cent hit to the economy is equivalent to around £300 billion, or £9,000 for every family in Britain, and shows why the Bank and Government are right to have protected households as much as possible with policies such as the Job Retention Scheme.

While the Bank’s scenario implies the UK economy will return towards its pre-pandemic growth path in 2021, it projects unemployment to remain above its pre-pandemic path until at least 2023 – after reaching a 25-year high of 9 per cent this year.

The Foundation says this shows that even if the economy recovers rapidly, Britain will be living with high unemployment for some time, and that policy makers will need to take a more active approach towards supporting people back in to work.

Yael Selfin, chief economist at KPMG UK, fears the UK economy could shrink even more sharply than the Bank of England has forecast.

The Brexit cliff-edge at the end of the year, when the UK-EU withdrawal agreement ends, creates added uncertainty, she writes:

“Despite the stark numbers issued by the Bank of England today, additional pressure on the economy is likely. Some social distancing measures are likely to remain in place until we have a vaccine or an effective treatment for the virus, with people also remaining reluctant to socialise and spend. That means recovery is unlikely to start in earnest before sometime next year.

“Looking at the medium term, beyond the impact of reduced investment, other forces could to be in play dampening future productivity. Supply chains are likely to be reconfigured in light of this crisis, potentially increasing geographical diversification and reducing efficiency in order to increase resilience. ‘Just in time’ operations are also likely to be a thing of the past, further eroding productivity. On the other hand, we could see significant consolidation among SMEs, lifting productivity among the long tail of underperforming businesses.

“Brexit is another significant downside risk for this year’s outlook, with the probability of a smooth transition to a comprehensive free trade agreement with the EU in January relatively small, adding further uncertainty to businesses and the prospect of increased trade frictions next year.”

Adrian Lowcock, head of personal finance at investment platform, Willis Owen, says the Bank of England’s forecast of a 14% slump in GDP this year is ‘the stuff of nightmares’

The only good news today is that the Bank expects this economic bombshell to be short-lived, and for the economy to bounce back rapidly. However, the MPC itself concedes it is flying blind to a large extent, warning that a pandemic like this is “especially difficult to quantify”.

Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, predicts the BoE will boost its stimulus package soon (reminder: two MPC members wanted to increase its QE programme)

“While the Bank of England did not change its monetary policy stance at today’s meeting, it is surely only a matter of time before they decide to. The 7-2 split on whether to increase asset purchases indicates a continued dovish bias from certain voting members.

With the Bank hoovering up gilts equivalent to those issued since the additional £200 billion in quantitative easing was announced, it will run out of firepower to support government spending within in months. Therefore, expectations will be high for an increase in the purchase target at the next meeting in mid-June.