Two Bank of England policymakers have warned that the damage inflicted on the economy is likely to be worse than the Bank thought only last month.
Deputy governor Sir Dave Ramsden and another member of the monetary policy committee, Gertjan Vlieghe, made their remarks to the Treasury select committee of MPs which is examining the economic impact of COVID-19.
In its quarterly Monetary Policy Report released in early August, the committee estimated the level of economic output would permanently be about 1.5% lower than it would have been without the pandemic’s disruption.
Other central forecasts included the fall in gross domestic product (GDP) being less severe than first anticipated, with a drop of 9.5% predicted for this year, though it could take longer than thought for the country to bounce back to pre-crisis levels of output.
In his evidence to the committee, Sir Dave said of the 1.5% so-called “scarring” figure: “For me all the risks are really that that number will be greater than 1.5%.”
Mr Vlieghe warned there was “a material risk” it could take several years for the economy to return to full capacity, with some sectors failing to recover.
In his own remarks, governor Andrew Bailey pointed to disparity within the committee over the potential long-term damage given that it was unclear how the pandemic would play out.
He cited an “uneven” recovery across the economy to date – with a “very fast” pick-up in consumption but “weak” investment by businesses.
He highlighted a high level of uncertainty facing firms in particular – given the continuing pandemic and the prospect that the UK could still leave the Brexit transition at the end of the year without a trade deal.
In reaction to the remarks, Paul Craig, portfolio manager at Quilter Investors, said it was right for the policymakers to remain cautious on how the recovery will play out.
He wrote: “What is clear is that the economy is going to need to be reshaped in order to recover.
“A sharp rise in unemployment is expected when the furlough scheme ends, while businesses will increasingly look to automation in order to plug gaps in their workforce and help control costs.
“As such some sectors and industries could be decimated despite consumption returning to pre-pandemic levels.
“It is becoming more and more obvious that the government will need to step in with more targeted fiscal support and provide more support for jobseekers.”
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