Bank of England 'ready to act' as economy shrinks
record 20%
12 June
2020
Bank of
England governor Andrew Bailey has said he will be "ready to take action"
to help the UK economy weather the coronavirus crisis.
He was
speaking after figures showed that the country's economy shrank by 20.4% in
April - the largest monthly contraction on record - as the country spent its
first full month in lockdown.
"We are
still very much in the midst of this," Mr Bailey said.
But he said
the figure was "pretty much in line" with what the bank expected.
"Obviously
it's a dramatic and big number, but actually it's not a surprising
number," he said.
The Office
for National Statistics (ONS) said April's "historic" fall affected
virtually all areas of activity, as large parts of the economy remained shut to
battle the pandemic.
The
contraction is three times greater than the decline seen during the whole of
the 2008 to 2009 economic downturn.
But
analysts said April was likely to be the worst month, as the government began
easing the lockdown in May.
What else
did the governor say?
Mr Bailey
said there were "signs of the economy now beginning to come back into
life", but the big question was how much long-term damage the pandemic
would cause.
"That's
the thing we've got to be very focused on, because that's where jobs get
lost," he said.
"Now
we hope that will be as small as possible, but we have to be ready and ready to
take action, not just the Bank of England, but more broadly on what we can do
to offset those longer-term and damaging effects."
What a
shrinking economy means in one town
The ONS
also published figures for the three months from February to April, which
showed a decline of 10.4% compared with the previous three-month period.
News of the
slump comes as almost nine million UK workers are having their wages paid by
the government, while the number of people claiming unemployment benefit
rocketed by 856,500 to 2.1 million in April.
What was
the political reaction?
Prime
Minister Boris Johnson warned of a "tough" few months ahead, but
added: "We will get through it."
"We've
always been in no doubt this was going to be a very serious public health
crisis but also have big, big economic knock-on effects.
"The
UK is heavily dependent on services, we're a dynamic creative economy, we
depend so much on human contact. We have been very badly hit by this."
Chancellor
Rishi Sunak said life would get "a little bit more back to normal"
once High Street shops could reopen.
That is set
to happen on Monday in England, while shops in Northern Ireland have already
been allowed to resume trading. Scotland and Wales have their own timetables
for easing restrictions.
In
response, shadow chancellor Anneliese Dodds warned that the UK's economy was
shrinking faster than those of other countries.
She said
the UK would need "strong action to help us climb out of this as quickly
as possible".
What has
happened to the economy?
In normal
times, a country's Gross Domestic Product (GDP) - the value of the goods and
services it produces - increases, making its citizens on average slightly
richer. However, the ONS said April's fall in GDP was the biggest the UK had
ever seen.
"[The
fall was] more than three times larger than last month and almost 10 times
larger than the steepest pre-Covid-19 fall," said Jonathan Athow, the
agency's deputy national statistician for economic statistics.
"In
April, the economy was around 25% smaller than in February."
What is GDP
and how is it measured?
What is a
recession?
He said
virtually all areas of the economy had been hit, with pubs, education, health
and car sales all seeing marked falls in activity.
Carmakers
and housebuilders were also badly affected, although Mr Athow told the BBC's
Today programme: "It's highly likely April will be the low point.
"Our
own surveys and wider indicators have suggested a pick-up in economy activity,
but I think it's really too early to know how quickly economic activity will
recover in the coming months."
So the
economy has shrunk 20%. How come the other 80% is still standing?
In large
part, thanks to the extraordinary levels of state intervention propping it up.
More than
one in four UK workers - some 8.9 million - are now on the government's
furlough scheme that allows them to receive 80% of their monthly salary up to
£2,500.
The scheme
has cost £19.6bn so far, while a similar programme for self-employed workers
has seen 2.6 million claims made worth £7.5bn.
Without
these schemes, household consumption, which makes up nearly two-thirds of the
UK's GDP, would have fallen even further.
Staying
positive
Sophie
Lawler's 17 health clubs remain closed to their 100,000 members in the north of
England and Wales. And like the rest of the fitness sector, she has no idea
when she might get the green light to reopen.
"The
whole sector has struggled financially, and may do so for years to come,"
she said. "The industry is shouldering quite some rental burden, costs we
still incur even while we're closed."
Furloughing
has been vital, she says, but she'd like the government to do more - perhaps in
the form of VAT exemptions or more support for leaseholders.
Despite the
uncertainties, however, she thinks the sector will weather the storm. "In
terms of demand, we will do pretty well when we get through to the other side
of this."
Three firms
still positive despite the crisis
The ONS
numbers add to the pressure to ease the lockdown more quickly, but fears around
the control of the disease have led to a step-by-step cautious approach.
There is some
pressure on the Treasury to consider similar economic rescue packages to those
made across Europe.
Germany,
for example, has cut VAT and offered billions in a package to help families
with children and purchasers of green cars. France is offering huge rescue
funds to the car and aerospace industry.
The
unprecedented jobs schemes here will help to protect livelihoods. But with this
scale of hit, it will not be enough.
How does
this slump compare historically?
During the
global financial crisis, from the peak in February 2008 to the lowest point of
March 2009, a total of 13 months, GDP shrank by 6.9%.
April's
unprecedented contraction is three times that - and it happened in one month.
The UK's
economy was already shrinking even before April.
It
contracted by 2% in the first three months of 2020, as just a few days of
impact from the virus pushed it into decline.
Economists
expect an even bigger slump in the April-to-June period, plunging the country
into a deep recession.
So where do
we go from here?
"Given
the lockdown started to be eased in May, April will mark the trough in GDP. So
we are past the worst," said Andrew Wishart, UK economist at Capital
Economics.
"But
the recovery will be a drawn-out affair, as restrictions are only lifted
gradually and businesses and consumers continue to exercise caution."
Tej Parikh,
chief economist at the Institute of Directors, said coronavirus had caused
"unparalleled" economic turmoil which was "likely to scar the UK
economy for some time yet".
"Having
provided businesses life support, the government must now figure out how to
stimulate activity," he added.
"Waiting
until later in the year to act will risk more businesses and jobs will be
lost."
How does
the UK economy compare with other countries?
We don't
really know yet. The UK is one of the few countries to publish monthly economic
data - most others just produce quarterly and annual figures.
We do know,
however, that coronavirus has already pushed several major economies into
recession:
On
Wednesday, the Organisation for Economic Co-operation and Development warned
that the UK could be the hardest hit by Covid-19 among major economies.
The British
economy is likely to shrink by 11.5% in 2020, slightly outstripping falls in
countries such as Germany, France, Spain and Italy, it said.
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