In its latest decision today, the MPC published a series of gloomy predictions about the economy as the UK strives to recover from the Cornavirus outbreak, the worst in Europe in terms of death toll.
The MPC says the data points this year to:
• A reduction in household consumption of around 30%
• Company sales around 45% lower than normal in 2020 Q2 and business investment 50% lower
• CPI inflation (currently 1.5%) to fall below 1% in the next few months
• A ‘pronounced rise’ in unemployment
• A sharp drop in GDP
• The possibility of a quicker recovery if the pandemic eases rapidly
The MPC says a “very sharp fall” in UK GDP in 2020 H1 and a substantial increase in unemployment is likely. However, if the pandemic eases and social distancing measures are relaxed relatively swiftly the fall in GDP “should be temporary and activity should pick up relatively rapidly” assuming a good scenario in terms of dealing with the pandemic both in the UK and globally.
However it will take the economy “some time to recover towards its previous path”, the MPC said.
The MPC believes a sharp economic decline this year is most likely but it is too early to be sure until the path of the pandemic is clearer economically.
The MPC said: “Economic data have continued to be consistent with a sudden and very marked drop in global activity. Oil prices have been volatile. There have, however, been tentative signs of recovery in domestic spending in China, and this is likely to be echoed in other countries that have started to relax Covid-related restrictions on economic activity.
“Financial markets have recovered somewhat over recent weeks and risky asset prices have picked up from their lows in mid-March. This in part reflects the actions taken by authorities in the United Kingdom and elsewhere.”
The MPC also voted 7-2 for the Bank of England to continue with the programme of £200bn of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves. This takes the total stock of purchases to £645bn.
Laura Suter, personal finance analyst at platform AJ Bell, said: “The bank paints a very gloomy picture of the UK economy, with a halving in business investment, a near halving in business sales, a sharp rise in unemployment and households cutting their spending by a third. The outlook for GDP is also bleak in the short term, with a 30% fall in the second quarter of this year compared to the end of 2019. Thanks in part to the fall in the oil price, inflation is set to fall below 1% this summer and remain around that level for the rest of the year.
“The Bank is still fairly confident of its projections of a V-shaped recovery, with economic activity picking up ‘relatively rapidly’ once social distancing measures are relaxed. However, it depends how they are relaxed, what businesses can open up first, how quickly they start spending and how much the public remains wary of going out and spending their money. All eyes will be on Boris Johnson’s announcement on Sunday to help determine whether we exit this downturn quickly or at a more sluggish pace.”
Jon Hudson, UK equities investment manager at Premier Miton, said: “With two members voting for an increase in asset purchases and inflation likely to fall further below the Bank’s 2% target in the coming months, the key takeaway appears to be to expect more stimulus in the coming months.”