Bank of England report economic damage is not as feared

Bank of England report economic damage is not as feared

Article updated: 6 August 2020 1:00pm Author: Helal Miah

  • As expected interest rates are held at 0.1% and the asset purchases at £745bn
  • Economy in Q2 is expected to be 20% smaller than Q4 2019
  • Unemployment rate expected to rise materially to 7.5% by year end, while GDP will only return to pre-crisis levels by end of 2021

As expected, the Bank of England has kept interest rates at 0.1% and the asset purchases at £745 billion. However, what’s more important is their assessment of the current state of the UK and global economy amid the pandemic. In this regard, policy members still believe that the damage to the economy is not as severe as first feared, but do expect the economy in the second quarter to be 20% smaller than in the final quarter of 2019. However, more recent high frequency data suggests that consumption levels have shown further improvements while the housing market appears to have returned to normal levels of activity.

Despite this, there is evidence that business activity and investment decisions remain very weak. By year end they expect the unemployment rate to rise materially to around 7.5% and GDP will only return to pre-crisis levels until the end of 2021.

This morning’s statement somewhat ties in with my view that we are still in the early days of the economic fallout from this crisis. We should welcome the recovery since the trough, but far more hurt is due to come down the road as the unemployment rate nearly doubles by year end, especially with furlough and job retention schemes ending by Autumn. Going forward, I fear consumption rates will be replaced by higher savings rates; meanwhile it’s fairly evident that businesses are extremely cautious and understandably so, with multiple waves of the disease and more lockdowns likely down the line.

Investors face a fairly tough choice at the moment: go with safe cash equivalent products with virtually zero or negative real returns, or invest in the stock market knowing that the UK and global economy is under severe strain. Those searching for income can still find decent yields, such as in pharmaceuticals and utilities, while even those that have cutback offer good long term yields prospects since investors can now buy them at lower prices, such as BP and Shell. Meanwhile, sectors that have done well out of this crisis such as technology and healthcare still attract growth seeking capital. As we have seen over the last decade, central bank policy has driven investor’s asset allocations, with an ultra-accommodative stance likely to be ongoing for some time yet. The Bank of England this morning suggests no tightening of policy until spare capacity is eliminated and inflation breaches 2%. I see nowhere else where money can be placed for some real returns.


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Helal Miah portrait photo
Helal Miah

Investment Research Analyst

After graduating with an economics degree from University College London, Helal started his career within private banking at Smith & Williamson Investment Management and later held analyst and fund manager roles with the Industrial Bank of Japan, Schroders and Mitsubishi Corporation. He is a chartered fellow of the Chartered Institute for Securities & Investment. 

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