Bank of England warns UK economy could shrink 30 per cent in first half of 2020

It is predicting the fastest and deepest recession in more than a century

                                

The coronavirus crisis will push the UK economy into a historically large recession, with output dropping 30 per cent in the first half of the year, the Bank of England (BoE) has said.

However it decided not to launch a new stimulus. In its monetary policy report, the central bank presented rough and ready predictions for the economy, suggesting that output would slide 3 per cent in the first quarter followed by a further 25 per cent fall in the second.

This would mean a 30 per cent drop overall in the first half of 2020, the fastest and deepest recession in more than a century.

In a warning to Britain’s banks, the BoE said the contraction would be even deeper and bank losses even greater if they refused to lend to companies, forcing them into bankruptcy.

The BoE said the UK’s unemployment rate was likely to rise to 9 per cent, even with the government’s job retention scheme protecting many employees from being laid off, meaning a higher rate of joblessness than after the 2008-09 financial crisis.

The central bank also forecast that inflation would fall to 0.5 per cent in 2021, before returning to the 2 per cent target the following year.

The BoE examined spending figures from a large survey of bank accounts to get its view that there had been “a reduction in the level of household consumption of around 30 per cent”.

In the financial stability section of its report, the central bank warned that if high street lenders failed to provide credit to their business customers, they might see a short-term benefit in reduced losses, but would cause more companies to fail and unemployment to rise another 2 percentage points.

The BoE also undertook an exercise to test whether the financial system could cope with the expected once-in-a-century recession and concluded that it could.

It assessed that banks would lose less money than in its latest stress test and stressed that the pandemic would severely hit corporate cash flow.

It said that while UK companies normally operate with a cash flow deficit of £80bn, the crisis would raise that to £190bn. Government support would close some of the gap, but there remained a £60bn additional deficit that banks would need to cover to stop viable businesses from getting hurt.

FURTHER READING: Bank of England cuts rates amid Covid-19 uncertainty

FURTHER READING: Bank of England cuts rates to lowest in history and increases bond buying

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