Bank of England warn of economic peril

The precarious nature of the economy, in the wake of newly announced lockdown measures in some part of the country, could force the Bank of England to inject more stimulus to help keep businesses afloat. Mr Vlieghe’s dire warnings came from a speech titled “Assessing the Health of the Economy”, in which he went to on describe what could unfold in the coming weeks and months. 

Far from reassuring the business sector, the policymaker demonstrated how the economy has suffered a much sharper slump this year than it previously did after the financial crisis. He stated: “Let me start with a bit of simple arithmetic to illustrate what is happening to the UK economy. If something drops by a quarter and then increases by a quarter, it ends up a little more than 6% short of where it started”.

He continued, adding; “It turns out that this is, approximately, what has happened to the UK economy during the pandemic so far. It’s actually a little bit worse. Between February and April, GDP fell by 25%. Since then, between April and August, GDP has risen by 22%. In August, GDP was about 9% below its February level.”

The MPC member then drew a direct comparison to the position the UK economy was in after the 2008 financial crisis. “Rather than trying to figure out what letter of the alphabet this looks like, I would like to give you some context of what it means to be 9% short of where you started, in GDP terms” he said. “In the global financial crisis, the UK GDP declined by 6% relative to its pre-crisis peak. Since we are 9% short of the pre-pandemic peak, in GDP terms, we are therefore not even at the bottom of the financial crisis”.

Mr Vlieghe concluded his remarks by mooting the idea of a stimulus package to steady the ship - though, as he points out, this is very much his personal view. The Bank of England will be keen to avoid the most common side effect of the previous economic crisis’ – mass job losses. In the wake of the 2008 crash, 3.3% of the UK workforce lost their jobs, while that figure was as high as 6.6% in the 1980s recession. If the UK suffers similar job losses at the end of this year, the Bank of England will surely have to act.

Current forecasts project unemployment figures being as high as 7.5% by the end of 2020, but worryingly, Vlieghe warns that number could be a conservative estimate. Should his warnings prove to be justified, the Bank of England may choose to introduce drastic measures – with negative interest rates being just one of the available options. In the context of British companies and their financial plight, Deputy’s staff rota app is a useful tool.

Vlieghe, an economist who joined the Bank of England from a City hedge fund, is one of four members of the nine-person MPC from the world of business and academia. The others are Silvana Tenreyro, a professor at the London School of Economics, former investment bank economist Michael Saunders, and Imperial College professor Jonathan Haskel. All have made supportive comments on negative rates, though bank officials have thus far been reticent to offer their support.

In summary, with the UK currently sleepwalking towards an unemployment crisis, the Bank of England will soon be called upon to intervene. Vlieghe’s concerns will likely act as a wakeup call to many, as his projections go further than prior official forecasts in terms of anticipating an imminent unemployment disaster. Time will tell whether his words are hyperbolic or prophetic. 

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