Bank of England governor Andrew Bailey urged the UK to be cautious about its recovery from the coronavirus pandemic despite growing economic optimism in the markets and among consumers and businesses.
Mr Bailey said the Covid-19 pandemic has been “both a demand and supply shock” for the economy and while the vaccine programme has been “a huge achievement”, the economy still starts at a lower level of activity because of the latest round of restrictions.
“There is light at the end of the tunnel,” Mr Bailey said in a virtual webinar on Monday, hosted by the Resolution Foundation.
“A note of realism though: our latest forecast in essence painted a picture of an economy that starts at a lower level of activity as a result of the current restrictions and people’s natural caution associated with the renewed onset of Covid, which then gets back to where it was pre-Covid by the early part of next year.”
Mr Bailey said the economic impact of the crisis has “been very large”, with UK gross domestic product by the end of the first quarter expected to be 12 per cent below the level seen at the end of 2019, which he called “ a huge shortfall”.
He also noted that the economic impact has been uneven across sectors, with those “that conduct activity involving large amounts of close human contact” the most seriously affected, which typically impacts “low paid workers, female workers, and … a concentration by ethnicity as well”.
While Mr Bailey said a rapid recovery is expected, with the economy set to return to where it was pre-Covid by early next year and inflation returning to the BoE’s 2 per cent target, he urged “cautionary realism” about the extent of the post-Covid recovery.
Mr Bailey said the expected recovery would be helped by the BoE's ultra-low interest rates and its bond-buying programme, which rose to £895bn in November.
His economic outlook statement follows UK finance minister Rishi Sunak's budget last week, which extended Covid support measures such as the furlough scheme, which will now run until the end of September.
Mr Sunak has already racked up Britain's highest borrowing since the Second World War, which will hit an estimated £355bn, or 17 per cent of GDP in the 2020/21 financial year.
The budget saw a rise in corporation tax to 25 per cent from 19 per cent, while tax thresholds on income tax were frozen until 2026. There were also measures to support economic growth through significant investment in infrastructure, skills and innovation.
Mr Bailey said this investment will potentially ease one of the drags on Britain's economy, but he stressed there was still considerable uncertainty over how changes seen in the economy since the crisis started in the way Britons work, consume and spend would evolve from here.
"We will work more from home than we used to and shop more online because new habits will persist to some degree, and to the extent they unwind it will be over a period of time," he said.
Before the crisis, only 5 per cent of employees worked mainly from home, however "remote working has become much more common and businesses have delivered services in new ways, often using technology to reduce personal contact", he said.
The governor, who tuned into the webinar from his office in the BoE for the first time this year, said that many people expect working from home to remain more common after the pandemic is over
“Half of new remote workers say they would like to continue to work from home all or most of the time, even when lifting restrictions permits a return to normal working patterns,” he said.
“Employers in some sectors also expect the proportion of staff that regularly work from home to more than double and many contacts of the Bank’s agents expect a hybrid model of two to three days a week spent in the workplace to become the 'new normal' for office workers.”
On the consumption side, he said the surge in online shopping accelerated a pre-existing trend with 33 per cent of total sales now accounted for by online sales, up from 20 per cent last year.
Meanwhile, he said the pandemic has changed consumer spending patterns, with much of the change driven by necessity.
“If some changes to consumer spending habits persist – for instance if tastes change – the pattern of production in the economy is also likely to change. The question is how will such a process of more structural change in the economy happen, and what will be the impact?”
Last month, the BoE said Britain's economy is expected to contract by 4 per cent in the first three months of 2021 before recovering rapidly over the rest of the year to regain its pre-pandemic size by the first quarter of 2022.
Britain has rolled out Europe's fastest Covid-19 vaccination programme, which has so far reached more than one in three adults for a first jab.
The BoE also gave British lenders at least six months' breathing space before any decision to use negative interest rates.
On Monday, he repeated that the BoE is preparing for negative rates, but said that is not a signal of intent to use them.
“We have been quite clear these toolkit decisions should not be interpreted as a signal about the future path of monetary policy," he said.
"These decisions are detached from our current or likely future policy decisions, but do recognise the increasingly two-sided nature of the risks we face, as we hope and expect to see the economy get over Covid."