The COVID-19-induced recession in the U.K. won't harm the economy as badly as first believed, the Bank of England said Thursday. However, unions and others say the bank is being overly optimistic.
The bank's Monetary Policy Committee released Thursday revised projections showing the U.K.'s gross domestic product contracting by 9.5 percent in 2020 compared with a previous 14 percent fall predicted in May. The central bank estimates a 9 percent rebound for the economy in 2021 and a further 3.5 percent growth in 2022.
It said, however, a full economic recovery would take longer than initially forecast. The bank estimated real GDP was 20 percent lower in the second quarter of this year compared with the fourth quarter of 2019.
Gov. Andrew Bailey said the recovery so far had been "very unevenly distributed." He rejected criticisms from some bankers and economists that the central bank's revised economic outlook was optimistic given the grim tone of its latest monetary policy report.
The bank said U.K. unemployment may almost double to 7.5 percent by the end of 2020. This means more than 2.5 million Britons will become jobless because of the pandemic. The banks said "considerable uncertainty remains about the prospects for employment after...support schemes unwind."
Trades Union Congress general secretary Frances O'Grady said the threat of mass unemployment hasn't gone away. Government ministers must act to save jobs, O'Grady said.
Recently updated indicators, such as consumer spending, suggest the recovery is now stronger than the bank estimated in May. The housing market appears to have returned to close to normal despite indications some households find it harder to get a mortgage. Household consumption in July, as confirmed by payments data, was less than 10 percent below its level at the start of the year.
The bank's more optimistic view contrasts with estimates from economic forecasters who continue to predict a slower recovery that may take several years. Berenberg Bank economists forecast a weaker 6.5 percent recovery in 2021 followed by growth of 2.2 percent in GDP in 2022. It believes real GDP won't return to its fourth quarter of 2019 level until early 2023.
The Bank of England's "overly optimistic updated economic projections" don't, however, leave the door wide-open for more monetary stimulus toward the end of the year, Berenberg senior economist Kallum Pickering said.
"Relative to the obvious challenges ahead linked to the COVID-19 pandemic, highlighted by the recent reimposition of modest containment measures in major parts of the U.K., the V-shaped recovery that the BoE continues to project seems unlikely, to put it mildly," Pickering said.
