By Ben Kerrigan
The UK faces a permanent £33bn annual hit to the economy due to the coronavirus pandemic, Bank of England governor Andrew Bailey told MPs on Wednesday.
Mr Bailey warned that structural changes in the economy as people change their behaviours in response to the pandemic could cause long-term “scarring” to growth and employment.
The prominent bank governor highlighted the fact that the Bank’s central scenario for the economy has more “downside risks” than in any previous forecast.
Behavioural shifts like the increase of people working from home will predictably reduce gross domestic product (GDP) by 1.5 per cent every year below its expected level, according to the analysis.
Sectors like retail and hospitals are likely to suffer bigger job losses than others.
“To the extent that there is structural change it is important because that’s what can result in scarring — longer term dislocation of pieces of the economy,” Mr Bailey told the Treasury Select Committee.
“It can lead to longer-term unemployment and a rise in the natural rate of unemployment for a period of time.”
Dave Ramsden, Bank of England deputy governor, presented a gloomy picture he said could turn out to be worse than forecast.
“We think the level of GDP will permanently be about 1.5 per cent lower. For me, all the risks are that the it will be greater than 1.5 per cent,” he said.
A mismatch between people’s skills and the jobs available as some sectors are damaged more severely than others, he warned.
“As we see the next phase of the recovery unfold we will be able to see the scale of the impact on the labour market but also be able to look at the degree to which the UK economy is repurposing in response to this shock.”
One semi-permanent effect might be a fall in value of office and shop space as people work remotely.
“That commercial real estate will probably see less investment in the near future,” he said.
Investment
Mr Ramsden said companies may choose to invest more of their money in capital rather than labour, as shoppers make more purchases online.
That might mean getting rid of shop-floor staff to spend money on distribution centres, websites, technology and vehicles, for example.
People will continue to show widely differing levels of caution about coronavirus, given the few firm assumptions can be made about vaccines, treatments and the course that the pandemic will take.
He highlighted the fact that the Bank’s central scenario for the economy has more “downside risks” than in any previous forecast. That means the Bank’s analysts think there is a significant risk that the UK economy could perform worse than the scenario suggests.