The Covid crisis will not have as many long-term economic effects in the UK as previous recessions, according to Bank of England governor Andrew Bailey.
Bailey today said his diagnosis of the UK’s economic recovery prospects was “positive, but with large doses of cautionary realism”.
The Office for Budget Responsibility (OBR) last week said it now forecasts a stronger economic recovery in the UK than previously expected.
The UK’s GDP will return to pre-crisis levels by the middle of next year – six months earlier than previously expected – and GDP growth next year will be the highest since 1941.
OBR GDP Forecasts (% growth per annum)
|Year||Forecast (Nov 2020)||Outturn / forecast (Mar 2021)|
Unemployment is also expected to peak at 6.5 per cent instead of the 11.9 per cent expected last July, according to the OBR.
Bailey told the Resolution Foundation think tank today that there would be “less economic scarring” than previous UK recessions in the 80s and 90s.
“It seems likely that task and job reallocation and capital redeployment has increased since then, for instance because workers will need less significant retraining to move between sectors,” he said.
“In our assessment, the supply capacity of the economy is expected to be around 1.75 per cent lower than it otherwise would have been in the absence of Covid by the end of our forecast period. But, of course, there are risks on both sides of this assessment.”
Chancellor Rishi Sunak spent a further £60bn to prop up the British economy in last week’s Budget by extending a series of Covid support schemes, such as the furlough scheme and business rates holiday, while creating a new recovery loan programme.
The extension to the furlough scheme, which sees the government pay workers’ wages, until September is set to delay any large increases in unemployment for the next six months.
The UK has now spent over £400bn on Covid, with government spending at its highest level since World War II.
Bailey said the UK’s spending had been a “a necessary and sensible response”.
“It means that the economic impact of Covid will be spread over time – how long we don’t know because it is too early to predict,” he said.
“But that cost has to be managed, and it will be easier to do that with a higher trend rate of growth, boosted by stronger investment.
“The message is simple – stronger growth in potential supply supported by stronger investment and productivity growth will make the Covid recovery easier.”