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UK GDP set for ‘dramatic’ 14% drop in 2020 amid coronavirus shutdown, Bank of England predicts

UK GDP set for ‘dramatic’ 14% drop in 2020 amid coronavirus shutdown, Bank of England predicts

Unemployment is expected to soar to 9%.

3 min read

The UK economy will shrink by 14% this year and Britain will face “a substantial increase in unemployment” amid the coronavirus pandemic, the Bank of England has predicted.

The grim scenario from the central bank’s Monetary Policy Committee says GDP will “fall sharply” in the first half of this year, before “recovering following the relaxation of social distancing measures”. 

Unemployment will, it predicts, rise to 9%.

The scenario comes ahead of a crucial Cabinet meeting at which Boris Johnson is set to review the wide-ranging lockdown measures that have been in place for more than six weeks, ahead of a major speech on Sunday.

The Prime Minister is under increasing pressure from his own backbenchers to allow people back to work - although there is not expected to be a major easing of the restrictions from next week.

The MPC’s latest report predicts the current curbs on activity will stay in place “until early June”, before being “gradually lifted” by the end of the third quarter of the year.

And it says: “UK GDP in the scenario falls by 14% in 2020 as a whole.

“Activity picks up materially in the latter part of 2020 and into 2021 after social distancing measures are relaxed, although it does not reach its pre-Covid level until the second half of 2021.”

UK GDP is “expected to be close to 30% lower” in the second quarter of this year compared to the end of 2019, it predicts - while business investment is expected to decline “very sharply” - by 26% compared to 2019 - this year.

"The flow of new Universal Credit benefit claims and early indicators of redundancies suggest that unemployment has risen sharply" - The Bank of England's Monetary Policy Committee

Meanwhile the Bank warns of a “substantial increase in unemployment” in the first half of this year - with job losses piled on top of a wave of furloughing by companies making use of the Government’s job retention wage-guarantee scheme.

The MPC says the unemployment rate in Britain is “expected to rise to 9%” in the second quarter of this year, despite the impact of the virus being softened by the Treasury’s moves to shore up the economy.

“As activity has fallen, the number of people in work has dropped sharply,” its report says.

“It is likely that the Government’s Coronavirus Job Retention Scheme (CJRS) has materially reduced the number of redundancies.

"Early data suggest that applications for furlough have been received from 800,000 companies covering over six million jobs. The number of people furloughed might be a little lower, though, as some could have more than one furloughed job.

“While the CJRS has significantly limited job losses, the flow of new Universal Credit benefit claims and early indicators of redundancies suggest that unemployment has risen sharply over the past couple of months.”

The MPS also warns that the supply capacity of the UK economy has already been reduced, with many furloughed employees “unlikely to seek other jobs” - and says increased working from home “by people with little previous experience of it” is likely to have “reduced efficiency somewhat”.

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