Andrew Bailey, governor of the Bank of England. Photo courtesy of the BoE.
The Bank of England has updated its forecast for the UK's economic performance in 2021, with GDP growth forecast to rise to 7.25% - up from the previous 5% forecast. Unemployment is also expected to peak at just below 5.5% at the end of Q3 this year; still higher than the approximate 4% of early 2020, but a lot lower than the speculated 12%.
The swift rollout of Covid-19 vaccines is allowing for the easing of lockdown restrictions, which in turn is helping economic recovery as people start to utilise things such as the hospitality sector again, but also return to workspaces which had previously been untenable.
The rebound has already been seen in nations like China, but the sheer size of it is the fastest economic growth rate since 1941 (8.7%), when wartime production was maxing out the economy.
The UK's GDP growth should also be qualified against the loss of nearly 10% last year due to Covid either incapacitating Britain's workforce, or hindering labour activities, and there are concerns with the latest surge in cases of Covid in both India and Japan. As such, the Bank of England is keeping interest rates at 0.1% - the lowest rates on record.
Speaking to the media yesterday, the BoE governor Andrew Bailey said: “Let’s not get carried away. It takes us back by the end of this year to the level of output we had essentially at the end of 2019 pre-Covid. So that is good news in the context of where we’ve been, but it still means that two years of output growth have been lost to date.”
The UK's next big challenge is to encourage businesses to take on new staff or even start-up to do so, and fill the gaps vacated by businesses that couldn't ride out the pandemic, but there are concerns over how to manage this. Inflation is rising, but attempts to curb it with interest rate rises could hurt the cheap loans on offer to inspire economic growth.
For now, with Andrew Bailey describing this inflation as “transitory”, it seems the BoE will stick to its guns over rates, but the departing Andy Haldane voted to cut the Bank's bond-buying scheme, as part of quantitative easing. With the improved economic sentiment, it makes sense for the Bank of England to slowly trim its financial support, but the Monetary Policy Committee voted 8-1 in favour of maintaining the £895 billion programme. Interestingly though, Zero Hedge points out that while the programme is continuing, the weekly level of buying will drop from 4.44 billion to 3.44 billion – extending the length of the scheme til at least the end of the year.