Economic downturn 'less severe than feared', Bank of England says

The Bank of England Credit: PA Wire/PA Images

The UK's economic downturn is forecast to be less severe than initially feared, but the country could take longer to recover, the Bank of England has warned.

Initial predictions in May had forecast the UK's GDP to shrink by 14% this year because of the impact of coronavirus, however this has been revised to a downturn of 9.5% following Government action aimed at protecting the economy.

However, the Bank also warned they do not expect the UK's economy to reach pre-virus levels until "the end of 2021".

Previous forecasts had suggested the UK could be back to the economic levels of 2019 by the second quarter of 2021.

The Bank of England also said during the first half of the year, the UK economy contracted by more than 20% in the first half of the year.

The bank revealed its forecasts as it held interest rates at 0.1% after its nine-strong Monetary Policy Committee (MPC) voted unanimously.

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The central bank also said it will maintain its current quantitative easing programme at £745 billion.

It also forecast that unemployment will jump, with the rate at 7.5% at the end of 2020, before gradually declining from the start of next year.

A consensus of analysts had said they expected rates to be held, while quantitative easing plans were also expected to remain unchanged.

Boris Johnson said people need the confidence to go back to workplaces in order to help the economic recovery.

During a visit to a housing development in Warrington, the Prime Minister told reporters there were “real signs of strength in the UK economy”.

“Unquestionably it will require people to have the confidence to go back to work in a Covid-secure way,” he continued.

“It’s also very, very important that we get all the schools back in September, on September 1 get all the pupils back into their schools. That will be also very, very important for getting our economy overall moving again.”

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Rates have already been slashed twice, from 0.75%, since mid-March as part of the Bank’s measures to try and keep the economy afloat.

The value of the pound picked up against the dollar after traders welcomed the decision to hold rates.

Fiona Cincotta, analyst at Gain Capital, said: “The Bank of England was considerably more upbeat about the recovery than had been expected.

“Upwardly revised growth forecasts, a more rapid recovery than initially feared and no tilting towards negative rates at this time has sent sterling surging towards 1.32 US dollars.”

Labour leader Sir Keir Starmer said the chancellor's focus in the long term "has to be on jobs and making sure that good businesses don't go under".

He urged Rishi Sunak to not end the furlough scheme for every business at the same time.

"Have some flexibility, have further support for the sectors that absolutely need it to make sure they don't go under," he said.

He added: "Nobody is arguing for furlough or support to go on for every job forever. What we're saying is that one size fits all doesn't work."