UK Could See Deepest Contraction In Over 3 Centuries

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The Bank of England has cautioned that the UK economy could suffer its deepest annual contraction in more than three centuries as a result of COVID-19, before bouncing back next year. The economy should start recovering during the second half of the year as the lockdown restrictions get lifted and ‘materially so’ in the latter part of the period, it said.

This would be the biggest annual rate of decline since 1706, and markedly more than anything seen in the aftermath of World War I when the economy was also laid low by the Spanish flu pandemic. The projected fall is also three times more than the recession of 2008-9 during the global financial crisis, according to the bank.

In what it described as a ‘plausible’ scenario, the bank said the British economy will be 30 per cent smaller at the end of the first half of the year than it was at the start of it, with the second quarter seeing a 25 per cent slump alone following a 3 per cent decline in the first.

Unemployment is forecast to more than double to nearly 9 per cent, but that figure does not include the 6 million workers who have been retained by firms as part of a scheme that sees the government pay up to 80 per cent of salaries, according to British media reports.

The central bank noted that the timeliest indicators of UK demand have stabilised in recent weeks, albeit at very low levels, after unprecedented falls during late March and early April. As a result, it anticipates that the economy will end 2020 with a 14 per cent contraction.

Over the longer term, the bank thinks that the British economy could revive quickly if the pandemic comes under control globally. It thinks that the economy could pick up by 15 per cent next year, which would be the biggest annual increase since 1704.

In fact, the bank expects the economy to be more or less back to where it was before the outbreak within three years, with the financial sector helping the corporate sector get through the strain.