The Bank of England predicted the worst economic collapse after the 1709 Great Frost, but is optimistic about the recovery. Many economists disagree: "The current conditions are unprecedented in our lives and all predictions are struggling to understand where the economy is now," wrote an economist.
The worst recession in over 300 years
The Bank of England (BOE) predicted a devastating outlook for the UK economy in its latest monetary policy report released on Thursday 7 May. The central bank's Monetary Policy Committee (MPC) has "defined a plausible illustrative economic scenario" to prepare for the potential impact of the crisis on the British economy.
The BOE noted, however, that an unprecedented crisis means that the economic outlook is "unusually uncertain", as it critically depends on "the evolution of the pandemic and how governments, families, businesses and financial markets respond".
Based on the bank's best estimates and historical data, the coronavirus crisis could push the British economy into the fastest and deepest recession of the past 300 years, after the huge economic crisis of 1706 and the Great Frost of 1709.
The UK economy could decline by 14% in 2020, the largest annual contraction after a 15% drop in 1706 and 13% in 1709. Total production is expected to drop by almost 30% in the first half of 2020, due to a drop of 3% in the first quarter and 25% in the second quarter.
Bank of England governor Andrew Bailey said that "a bankruptcy in the lending system would create a vicious circle of more bankruptcies and more loan losses that would return to the banks themselves," reported the Financial Times.
However, the bank has warned that even with the most appropriate lending measures, the UK economy is set to suffer a severe blow, pointing out that household spending has already fallen by around 30% since the beginning of March. The central bank also predicted that the unemployment rate in the UK is likely to reach 9% in 2021.
Economic recovery forecast
The governor of the Bank of England explained that the economic rebound could probably happen "much faster than the recovery from the global financial crisis," the media quote.
A rough estimate from the central bank hypothesized that the long-term damage to the economy would be only 1,5% of gross domestic product and would result from a failure investment corporate in 2020.
The Bank of England also said it was ready to inject more money into the economy if needed. In March, it promised £ 200 billion ($ 248 billion) to support economic activity by buying government bonds.
Some strategists and economists doubt that the British economy will recover quickly as the central bank claims. Jacob Nell, chief British economist at Morgan Stanley, said: "We believe these forecasts for 2020 are credible, but we are less convinced of the recovery of 2021, in which we take a more cautious view, with weaker growth, lower inflation, deficits wider and more actions from the MPC. "