The UK economy is entering recession and the government will need to step up its response to stop the shock of the coronavirus outbreak doing lasting damage, said former Bank of England policymakers.
The effects of disruption to travel and supply chains, workplace closures and event cancellations, and the sharp drop in social activity, have yet to show up in official data. But economists increasingly see it as inevitable that UK output, which stagnated in the three months to January, will contract in the first half of the year.
“The global response to this global shock almost guarantees linked recessions in the major trading economies,” said DeAnne Julius, a former member of the monetary policy committee.
“Obviously we now have a ‘sudden stop’. On the presumption that this lasts until, at least, late May, one assumes that GDP growth in both Q1 and Q2 will be highly negative,” said Sushil Wadhwani, a former member of the BoE’s monetary policy committee, now chief investment officer at Wadhwani Asset Management.
Andrew Sentance, an MPC member during the global financial crisis, agreed that a recession in the UK and other countries was likely in the first half of the year. The first quarter’s fall in output could be small, and partly offset by panic buying, but a drop of 2 per cent to 5 per cent in GDP in the second quarter, followed by a rebound later in the year, seemed “quite a plausible outcome”, he forecast.
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Policymakers said their main task is to prevent the immediate shock of the coronavirus from leaving long-term scars on the economy. “That is something that we want to minimise and stop,” Andrew Bailey, the new Bank of England governor, told the BBC on Monday, promising that the central bank would continue to take “prompt action” to try and prevent economic effects outlasting the Covid-19 outbreak itself.
David Miles, a former MPC member and professor at Imperial College London, said that while a recession on the standard definition — two quarters of falling output — was quite likely, stock markets appeared to be pricing in a “near Armageddon” scenario of “a huge hit to GDP that lasts for very many years”. He added: “I don’t think we should be that pessimistic!”
“The key point is that recovery may be rapid,” said Martin Weale, an MPC member from 2010 to 2016. But both he and other former MPC members said that with central banks low on ammunition, ministers would need to do more to avert the risks of longer-term damage.
Mr Weale said the government might need to offer more direct state support, on top of the measures taken by the BoE to support lending, to help businesses avoid bankruptcy, and to support people whose incomes dropped because they were in quarantine or lost their jobs.
“The macro policy response should be to allow the national debt to rise by the costs of the epidemic. That way paying for it can be spread over the long run,” he said.
Mr Sentance added that with little scope for further monetary stimulus, “It will be down to the government to provide short-term fiscal relief and logistical support.”
Mr Wadhwani warned there was a significant risk that bankruptcies, higher unemployment and delayed business investment could have adverse long-term effects on the economy — as well as psychological effects on consumers’ future willingness to spend on luxuries.
He said there was a case for giving the BoE the remit to vary the rate of value added tax, adding that it was “critically important that monetary policymakers ‘do no harm’”.
Jagjit Chadha, director of the National Institute for Economic and Social Research, also expected the economy to shrink in the first half of the year and said policymakers could consider the kind of measures seen in a wartime “command economy” — using spare capacity in manufacturing or the hotel sector for efforts to fight the virus, or training people for health work.
Meanwhile, City economists are moving to cut their forecasts for short-term UK growth, forecasting further action from the central bank and government to ward off longer term damage.
