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Bank of England makes u-turn on prediction of fast economic recovery for UK

By Ramla Soni

15:31, 6 August 2020

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The Bank of England has changed its prediction that the UK economy would recover quickly from the recession caused by the coronavirus crisis, and said that GDP would not exceed pre-pandemic levels until the end of 2021.  

The Monetary Policy Committee (MPC) left interest rates on hold at 0.1 per cent with its target for the total stock of its asset purchases also unchanged at £745bn (€827bn, $981bn).  

It said the initial hit from lockdown measures had not been quite as severe as it had projected in May, although it expected output to be more than 20 per cent lower in the second quarter of 2020 than it had been in the final quarter of 2019. 

A strong recovery in some areas of consumer spending is expected to drive a rapid rebound over the coming months. The pound rose 0.4 per cent against the US dollar to $1.316 after the decision, its highest level since March.

The MPC was also more optimistic about the outlook for unemployment than it had been in May, predicting the jobless rate would peak at about 7.5 per cent at the end of this year, before declining gradually. 

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The BoE forecast the recovery would slow dramatically after the third quarter of 2020, reflecting consumers’ continued concerns over health risks and fears over job security. By the end of this year, GDP is expected to remain five per cent below its pre-pandemic peak and only to regain its pre-crisis level at the end of 2021. 

Even by the end of 2023, when the forecast period concludes, GDP would remain 1.5 per cent below its pre pandemic trajectory, according to the bank. This long-term damage is because business investment and start-up activity is expected to remain weak, weighing on productivity.   

The bank’s Financial Policy Committee said companies continued to face a severe cash-flow shock, with many likely to need further finance to survive the disruption. It predicted that if the economy followed the path set out in the BoE’s central projections, companies could face a cash-flow deficit of up to £200bn in this financial year. 

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