UK economy to bounce back quickly, predicts Bank of England
- Bank of England (BOE) expects the UK economy to bounce back from COVID-19 downturn in 2021
- Policymakers leave monetary policy settings and interest rates unchanged
- New data shows stamp duty break had a positive impact on the housing market and UK economic growth
- UK nightclubs and travel sector in desperate need of support to survive COVID crisis
During the Bank of England’s (BoE) February monetary policy meeting, policymakers said that they expect the UK economy to bounce back from the COVID-induced recession as the number of people vaccinated increases.
The BoE’s Monetary Policy Committee (MPC) unanimously voted to keep interest rates unchanged at 0.1% and also refrained from expanding its GBP 895BN quantitative easing programme amid cautious optimism over the UK’s economic recovery prospects.
While the central bank left the door to negative rates open, the standout message from policymakers was that there is limited enthusiasm for negative interest rates.
The MPC anticipate the economy staging a robust recovery towards pre-COVID levels over 2021 due to the UK’s vaccination programme.
Policymakers said they expect the UK’s rapid vaccine rollout will reduce the risks to public health, and in turn, allow the British government to ease coronavirus restrictions on a more permanent basis.
Rapid rollout of vaccines supporting UK economic outlook
According to the latest government statistics, more than 10 million people have received their first vaccine dose, while just under 500,000 have been completely inoculated against COVID-19.
With the UK on track to achieve its mid-February target, UK Prime Minister Boris Johnson could lift lockdown restrictions earlier, allowing economic recovery to get underway sooner.
While the third national lockdown will likely cause the UK economy to contract in Q1 of 2021, the MPC said it is unlikely that the downturn will be as severe as the decline recorded in Q2 2020.
Unlike the 19.8% contraction witnessed in the three months to June 2020, the BoE predicts UK gross domestic product (GDP) shrinking by 4% in the first quarter of the year.
However, the BoE warned that the outlook for the UK economy remains “unusually uncertain”, with Wednesday’s release of UK Services PMI data igniting fresh fears over a double-dip recession after the index slumped to 39.5 in January from 49.4 in December.
While the figure was lower than consensus forecasts for a drop to 38.8, the service sector remains significantly below the 50 mark, which is the level that separates contraction from growth.
Moreover, the latest developments will ramp up the pressure on Chancellor Rishi Sunak to provide English businesses with more financial support and protect jobs.
It comes when the Chancellor is considering ways to reduce the UK debt, which hit a peacetime record of GBP 2.1TN December-end.
Although the UK’s vaccine rollout is expected to underpin economic recovery, public borrowing is forecast to hit GBP 394BN by the end of the financial year, predicts the Office for Budget Responsibility (OBS).
However, the BoE hopes that continuing low-interest rates will boost economic growth by “encouraging businesses to borrow and discouraging individuals from saving, both of which should raise spending levels and help our economy to recover.”
According to the BoE’s latest projections, unemployment levels will only be marginally higher than they are now in 2022; UK inflation will rise sharply as VAT reductions end and the economy will return to its pre-pandemic level in Q4 of 2021.
The central bank was taken aback by the strength of the economy in Q4 2020, which was when the November lockdown took place, noting that many parts of the economy, such as the housing sector were surprisingly resilient.
Housing market activity driven by stamp duty break
Britain’s housing market defied all odds during the pandemic, primarily due to Rishi Sunak’s stamp duty holiday and pent-up demand caused by lockdowns which triggered a mini-market boom and exponential housing price growth.
According to new data from HMRC stamp duty statistics, Stamp Duty Land Tax (SDLT) transactions increased by 43% in Q4, while the total number of SDLT transactions were 14% higher than the same period the previous year.
The HMRC cited the stamp duty break on residential properties as the reason for growth, as well as a release of pent-up demand due to buyer preferences changing amid the pandemic.
Despite rising unemployment levels, residential property transactions surged by 44% in the three months to December and were 16% higher than in the corresponding quarter in 2019.
Nick Leeming, chairman of property experts, Jackson-Stops, said the latest data is a clear indication of “the positive impact the stamp duty break has had for the property sector and the broader UK economy.”
With so many transactions at risk of missing out on the stamp duty savings due to the time it takes to process applications, Mr Leeming urged the government to consider tapering the SDLT relief to allow buyers to get their transactions over the line.
He added: “This will ensure the housing market and other interconnected sectors of the British economy don’t suffer a sharp shock during one of the most challenging and uncertain periods of the pandemic.”
UK travel sector and nightlife industry in dire straits
The housing market isn’t the only sector of the UK economy at risk of “suffering a sharp shock.”
The travel and nightlife industries have also suffered substantial damage amid the Coronavirus pandemic. Many industry leaders have warned Chancellor Rishi Sunak that their businesses may not exist without urgent financial support.
The Save Future Travel Coalition, a collaboration of twelve industry bodies including Abta, SPAA, Aito and Clia, launched a fresh petition to Mr Sunak, pleading for “tailored” aid across inbound and outbound sectors in the March budget.
The letter to Mr Sunak highlights the “devastating” impact the flip-flop cycle of COVID-related travel restrictions, bans and lockdowns have had on the travel industry. The Save Future Travel Coalition pointed out that there was only one three-week period where Britons could visit the whole of Spain, which is Britain’s most popular holiday destination.
Nightclubs, DJs and other nightlife industry bodies have also called for emergency financial support from the UK government.
According to a recent survey of 100 nightclubs across the UK, more than 80% of those surveyed said their business would not survive beyond February.
The Night Time Industries Association (NTIA) made an urgent plea to the UK government for aid. The NTIA also condemned the Chancellor for the “limited and hugely disproportionate support” offered up until now.
Michael Kill, CEO of the NTIA, proposed making changes to planning laws allowing landlords to convert venues into housing, and greater transparency on an exit strategy to reopen the sector.
Industry officials have warned four in five nightclubs are on the brink of collapse due to the extreme financial hardships suffered since the pandemic began in March 2020.
However, the NTIA delivered a far starker warning, stating that nightclubs will become extinct in 2021 without “urgent”.