Bank of England governor Andrew Bailey has called the development of seemingly effective coronavirus vaccines “a big step forward” for the economy that could help lower uncertainty and get firms investing again.
Speaking at lobby group The City UK’s conference, Bailey said both coronavirus and Brexit had “increased uncertainty” and “restrained investment”. He also said that business investment had been “unusually weak” since the financial crisis, weighing on productivity.
“Of course there is a lot to do, and important steps to take and evidence to gather,” Bailey said. “But this is a big step forward, and it will play a major role in lowering the level of uncertainty.”
The governor – who took over from Mark Carney as the coronavirus crisis began in March – said there was “some light at the end of the tunnel”.
Yet Bailey said there was likely to be some “scarring” to the economy. That is, some longer-term pain as the economy adjusts to a new normal.
However, the BoE boss said the difficulties will not be like those seen in the 1980s and 1990s. Then, the economy was changing from being industry-based to services-based, with a particularly painful move away from mining.
Covid could ‘spur’ higher productivity
Bailey said the changes due to coronavirus will more likely be within the services sector. This can already be seen, with a focus on digital services over face-to-face work taking hold.
He said that Covid may even “be the spur” for an increase in productivity. A footnote to his speech suggested the pandemic “might open up the possibilities of new business models, products and ways of working”.
The governor again stressed that companies face big cash flow problems. He cited the Bank’s report in August that said firms could face a cash flow deficit in the current financial year of up to around £200bn.
Yet he said companies had successfully tapped financial markets and lenders for money. He said that a decade on from the financial crisis, “the financial system is supporting the economy, not the other way around, and that is how it should be”.