Bank of England (B.O.E.) revised economic predictions 2020-2022

The keenly awaited Bank of England (B.O.E.) economic prediction for the remainder of 2020 and looking forward to 2022 was issued yesterday. It was carefully framed as a projection rather than the usual forecast format due to the inherent uncertainties regarding the possibility of a second wave of COVID-19.

The issue of consumer confidence is prominent in the report, which could be tempered by rising unemployment later this year, following the ending of the furlough scheme. Another issue is whether further focused financial stimulus can or will be provided by the government to support affected sectors trading through the return to work phase – and for a further 12-18 months. This would help to ensure that when the demand side of the economy returns to normality key industries will be more technology-driven, have an increasingly upskilled the workforce and productivity in the UK will be competing with and exceeding other G7 countries.

Projections

UK economic output in 2020 is predicted to decline by 9.5% – which is an improvement on the previously predicted decline of 14%. The improvement of the 2020 projection is due to a larger than expected surge in consumer spending in the second quarter of 2020. However, this increase in spending should be considered against a backdrop of government support provided to businesses via the unprecedented furlough scheme, resulting in furloughed consumers still receiving 80% of their pay where previous recessions have resulted in unemployment arising much sooner. This period of relative stability is set to end on 31 October 2020 with the termination of the current furlough scheme, and unemployment could rise to 2.5million or 7.5% by the end of 2020.

The key and most fundamental assumption in the B.O.E. projections is that the effects of a possible second wave of the pandemic has not been factored in which seems unduly optimistic given current medical and scientific opinion.

Growth

The Monetary Policy Committee (MPC) is also predicting growth of 9% in 2021, returning economic output to pre-pandemic levels and by 3.5% in 2022. This appears optimistic as many other economic experts are predicting a much slower recovery which will be held back by lower spending on capital investment and continuing poor levels of productivity.
The current potential £9.5 billion being set aside to incentivise businesses to retain returning furloughed workers, by offering £1,000 per employee if they are retained to 31 January 2021, is not likely to achieve the required effect of halting unemployment but possibly to only delay inevitable job losses early in 2021.

A more targeted approach is needed

One has to wonder whether a more targeted approach focusing on key affected sectors such as manufacturing, aviation and leisure would be more effective. Targeting these sectors by providing finance for working capital and support capital expenditure for projects focusing on embracing the technological and digital age, training young people in the new digital age and upskilling the existing workforce from low paid manual workers to a motivated, better paid and productive members of UK plc.

If you would like to discuss the topics explored in this article, please contact your usual Kreston Reeves contact or Rodney Sutton.