Bank of England says UK economy could shrink 30% in first half of year

Unemployment to surge to about 9% in the second quarter – the highest since 1994

GLASGOW, SCOTLAND - MAY 06: Two police officers walk past posters on Sauchiehall Street during the coronavirus lockdown on May 6, 2020 in Glasgow, Scotland.  The country continues quarantine measures intended to curb the spread of Covid-19, but the infection rate is falling, and government officials are discussing the terms under which it would ease the lockdown. (Photo by Jeff J Mitchell/Getty Images)
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Hiring activity in the UK slumped in April as the Bank of England warned the economy could shrink 30 per cent in the first half of the year, which would be the deepest recession since 1709, due to lockdown measures put in place to limit the spread of the coronavirus.

"While there are wide bands of uncertainty around any estimates of activity at the present time, UK GDP is expected to be close to 30 per cent lower in 2020 Q2 than it was at the end of 2019," the central bank's Monetary Policy Committee said in a report on Thursday.

"UK GDP is expected to have fallen by around 3 per cent in 2020 Q1 and then to fall by a further 25 per cent in Q2," it said. GDP could decline by as much as about 14 per cent for the whole of 2020 – considerably higher than the 6.5 per cent drop predicted for the UK by the International Monetary Fund last month, the central bank said.

The Bank's economists said claims for different types of unemployment support had risen "markedly', which was "likely to portend a pronounced rise in the unemployment rate, to around 9 per cent in the second quarter" - a higher rate even than in the wake of the global financial crisis, when unemployment peaked at 8.5 per cent in the third quarter of 2011, according to government data.

Many more people are currently likely to be underemployed as a result of companies furloughing workers until virus restrictions are lifted. As a result, consumer confidence has "declined markedly and housing market activity has practically ceased", the MPC said.

UK payments data points to a 30 per cent fall in household consumption in March and April and companies are forecasting a 45 per cent decline in sales and 50 per cent cuts in investment.

The committee voted to keep interest rates at a record low 0.1 per cent and to maintain a programme of buying treasury and corporate bonds that is set to reach £645 billion (Dh2.93 trillion) by July at its current pace.

The slump has hit the jobs market hard, with both permanent and temporary hiring of workers dropping to new lows, according to survey data.  A KPMG and REC UK jobs report found that both permanent hiring and temporary billings fell to their lowest level since the survey began 22 years ago as employers freeze any new hiring activity.

“The uncertainty over the outlook is weighing heavily on the nation – we estimate that as many as 13 million jobs are highly affected by the lockdown, representing just over a third of all jobs in the UK,” said James Stewart, vice chair of KPMG.

“All eyes will also be on the government’s forthcoming announcement on easing current restrictions so confidence in the jobs market can start to rebuild,” he added.

Earlier this week, the UK’s Purchasing Managers’ Index – a composite measure of the health of the private sector economy, fell to an all-time low of 13.4 in April, down from 36.3 in March. A reading above 50 indicates an expanding economy and one below 50 indicates contraction.

Record lows of activity were reported in several sectors, including manufacturing, services and construction.

A decision on whether to maintain current lockdown measures or to ease some restrictions is expected on Thursday.

With businesses expecting some more positive news on restarting some parts of the economy “it is likely that the April output index reading will hopefully represent a nadir for the survey”, said Chris Williamson, chief business economist at IHS Markit, which compiles the PMI data.

“However, any return to growth still looks a long way off and will be from an exceptionally low base. Operating capacity is likely to be constrained in many sectors, and social distancing will remain a part of everyday life for some time to come,” Mr Williamson said.