‘UK economy struggles to recover from COVID-19 blow’

Britain’s economy is unlikely to recover fully from the “searing experience” of the coronavirus in the next two to three years, Bank of England (BoE) policymaker Michael Saunders warned in the gloomiest medium-term assessment to date from a UK policymaker.

Saunders, one of two BoE officials who unsuccessfully voted to expand the BoE’s record bond purchases this month, said it would be better to do too much stimulus than too little, given the scale of the threat to the economy.

Even as the lockdown eases more, fears of further job losses and companies going bust, as well as a possible second wave of COVID-19 infections, would weigh on the economy, he said.

“If unchecked, there are risks of a vicious circle, whereby the economy gets stuck in a self-feeding loop of weak activity, pessimistic expectations and low investment,” Saunders said.

The BoE published a scenario on May 7 showing economic output would return to pre-COVID levels next year, despite a historic 25% fall pencilled in for the current quarter. Government budget forecasters have also assumed a rapid rebound.

But Saunders said that even if growth initially bounced back sharply as some businesses get back to work, output could easily be 10% below its pre-COVID level a year later, bringing with it long-term consequences.

“The searing experience of such a dramatic drop in incomes, jobs and profits is likely to have lasting behavioural effects, as after previous crises,” he said.

An estimate by the BoE that potential economic output in three years’ time would be just 1-2% lower than it forecast in January, represented a “relatively benign outcome” compared with past downturns, Saunders added.

The BoE cut interest rates to a record low 0.1% and announced a record 200 billion-pound ($245 billion) increase in its bond-buying progamme in March.

It held off on fresh action at a meeting this month but is expected to increase its bond-buying programme on June 18 at the end of its next meeting.

Saunders said he did not think waiting a month before increasing asset purchases was likely to bring much new information about the economic outlook.

“It is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low inflation rut,” he said.

There was also a risk of long-term unemployment problems if the BoE failed to provide enough stimulus, Saunders said.

There was also a risk of long-term unemployment problems if the BoE failed to provide enough stimulus, Saunders said.

The unemployment rate has probably already risen to around 9% - its highest since the mid 1990s - despite a government scheme supporting companies affected by the coronavirus to keep more than 8 million people in work, he said.

Meanwhile, the pound rose around half a per cent against a weaker dollar on Thursday, but was little changed against the euro, as Brexit-related risks and speculation about negative interest rates continue to limit the pound’s gains.

The safe-haven dollar fell to a near two-month low as global risk appetite was boosted by investors’ optimism about economies re-opening. A 750-billion-euro stimulus plan in Europe lifted regional stock indices and the euro.

The pound gained as much as 0.6% against the dollar, reaching $1.2335. It was last at $1.2314, up around 0.4%.

Versus the euro, the pound was broadly flat, at 89.75 pence .

Before coronavirus, the last time cable was this low was in early October, when markets feared a no-deal Brexit was imminent.

The market has turned increasingly short on sterling for the last 11 weeks straight, according to weekly futures data .

“Sterling’s only support is the size of the short positions, and thin month-end markets magnify that support, but that doesn’t change the fundamentals,” Societe Generale strategist Kit Juckes wrote in a note to clients.

The pound is being held down by several factors: a lack of progress in EU trade talks, speculation about negative interest rates in Britain, a deep recession and a growing pile of debt.

Sterling fell 1% on Wednesday after Britain told the European Union on Wednesday it needed to break a fundamental impasse to clinch a Brexit trade deal by the end of the year.

Britain has the worst COVID-19 death toll in Europe. A COVID-19 test and trace service began in England on Thursday to allow the loosening of lockdown measures for most of the population.

But nearly half of businesses in Britain that have temporarily suspended their operations because of the coronavirus lockdown are unsure when they will re-open.

UK shares fell for the first time this week on Friday, as fears over Washington’s response to Beijing tightening control over Hong Kong overshadowed optimism about a pickup in business activity with the easing of a coronavirus-induced lockdown.

The blue-chip FTSE 100 was down 0.9%, with BP and Royal Dutch Shell among the biggest drags, while the mid-cap FTSE 250 shed 0.8% to snap a nine-day winning streak.

Banks tracked a decline in gilt yields as investors fled to perceived safe-haven assets ahead of US President Donald Trump’s news conference on China’s move to impose national security legislation on Hong Kong that has raised concerns over its function as a global finance hub.

Building materials supplier SIG jumped 8.2% on plans to raise 150 million pounds ($185.12 million) in new equity with US buyout firm Clayton, Dubilier & Rice (CD&R), as it pointed to a bleak outlook after disappointing results.

Reuters