Recovery encouraging, job losses concerning - if in doubt, print money
A recovery is underway and the encouraging news is that theBank of England thinks it looks stronger than the one it envisaged a month ago.The cause for concern is the scale on which jobs are being lost. If in doubt, print money.
The Bank’s Monetary Policy Committee (MPC) has voted to create another £100 billion and push it out into the economy to deal with the impact of the “unprecedented” recession.
“I think news on the labour market is significant,” the Governor of the Bank of England Andrew Bailey told journalists.
“There are some puzzles but, on balance, we think it is negative.”
Bailey was born in 1959. He grew up in the 1970s and joined the Bank in the 1980s when the unemployment rate hit 12% - it currently stands at 3.9% - and three million people found themselves out of work.
On Tuesday, the Office for National Statistics (ONS) estimated that more than 600,000 people have been taken off company payrolls since the lockdown began in March.
The number of people claiming benefits has more than doubled.
Asked if we face the worst employment crisis in his lifetime, Bailey replied: “I have no doubt that we are looking at the steepest trajectory of a rise in unemployment because of the sheer nature of what has happened, in this case of the rapid close down of the economy.
"What the end point will look like, relative to [the 1980s] I think is still to be seen.”
With Bank Rate at a record 0.1%, the Bank of England’s armoury is looking sparse. It has turned to its policy of quantitative easing to boost spending and investment in the economy.
Before the end fo the year, the Bank will create another £100 billion and use it to buy UK government debt.
The aim is to ensure the Bank hits it inflation target by pushing down interest rates and making it cheaper for households and businesses to borrow money.
Conveniently, it also means that the government is able to borrow extraordinary sums of money without having to worry about whether there is a market for its bonds.
The minutes from the MPC’s meeting on Wednesday reveal cause for some optimism. The MPC judges that the fall in output between April and June is “less severe” than it envisaged last month.
The Bank says the evidence suggests the economy will probably shrink by 20% between April and June, less than the 27% the Bank estimated in the “illustrative scenario” it published in May.
The recovery in consumer spending is stronger than expected. Demand for DIY goods, car sales, clothing, takeaway food and household goods has rebounded. Housing activity has picked up.
Inflation is well below target and behaving largely as the Bank predicted.
But the Bank’s network of agents across the UK also report increased anxiety. Households feel “very pessimistic” about the future, businesses expect to make redundancies, furloughed workers (understandably) have a “fear of unemployment”.
The Bank says that the take-up for the government’s Job Retention Scheme has also been stronger than it expected. 9.1 million jobs are currently furloughed.
Not everyone will find they have a job to return to. As the Bank puts it, there is “a risk of higher and more persistent unemployment in the United Kingdom”.
The level of uncertainty around what happens next remains extreme. Much depends on the government’s ability to reopen the economy without triggering a resurgence in Covid-19 infections.
The downturn may turn out to be less severe than the Bank expected but the relationship between output and unemployment may also turn out to be less benign than during the last recession in 2008.
Many economists believe the levels of unemployment is heading back to the Eighties.