If the Bank of England is right, Britain is on course for its strongest annual growth since 1941 – the year of Pearl Harbor and Hitler’s invasion of Russia.
The latest forecasts from Threadneedle Street are stronger in every respect than those it came up with three months ago: the hit to growth during the first-quarter lockdown has been less severe, the bounce back will be more rapid, and the peak in unemployment will be significantly lower.
This represents a classic V-shaped recession – a deep plunge in output followed by a fast recovery. It took half a decade for national output to regain its pre-crisis peak after the financial crash of 2008, but this time it will do so in less than two years. That, as the Bank’s governor, Andrew Bailey, pointed out is “very good news” because it means fewer people lose their jobs and fewer businesses go bust.
There are a number of reasons why the Bank has upgraded its forecasts. Businesses have learned how to operate during lockdowns, meaning the fall in GDP during the first quarter is now expected to be 1.5% rather than 4%.
The success of the NHS’s vaccine programme will allow restrictions to be lifted earlier than the Bank previously envisaged and it now expects a bigger proportion of the excess savings accumulated during the past year to be spent. In February, it was forecasting that 5% of an £125bn would be spent; it has now raised that estimate to 10% of £200bn.
The really big change over the past three months has been the result of the budget decision to extend the furlough scheme from April to September. As things stood in February, the Bank could see a situation where wage support was ended before restrictions had been lifted, leading to workers in sectors such as hospitality and leisure facing a spell of unemployment before finding a new job. It now thinks that will largely be avoided, which is why its forecast for the unemployment peak has been cut sharply – from 7.75% to 5.5%.
The 7%-plus growth this year will take the economy back to where it was in the fourth quarter of 2019. That still represents two years of lost output, even though Bailey and the chancellor, Rishi Sunak, would have been delighted at such an outcome when the economy went into its third lockdown just after Christmas.
The Bank does not see this as the start of a golden period for the economy. After catching up lost ground in 2021, growth will still be relatively swift at 5.75% next year but then slows to 1.25% in 2023.
Stronger-than-expected growth in the short-term means the Bank will not have to resort to negative interest rates, but a rise in official borrowing costs still looks some way off, at least for now.
The Bank says any increase in inflation as the economy fully emerges from hibernation will be temporary, but there are two risks to its forecast. The first is that it is underestimating the number of firms that will go under as state support is withdrawn later this year. The other is that surprising strong growth will be followed by surprisingly strong inflation as supply struggles to match demand.