UK economy to ‘recover rapidly’ this year as vaccines are rolled out, Bank of England says

Output to shrink 4.2 per cent in first quarter of 2021 as lockdown measures take toll but Covid vaccine rollout will aid quick recovery, Bank forecasts

The Bank has not voted to raise rates since the dawn of the credit crunch in July 2007

The UK economy could return to pre-pandemic levels by early next year as the vaccine rollout leads to an easing of restrictions and people become less fearful of coronavirus, the Bank of England has forecast.

The Bank estimates that the economy shrunk 10 per cent last year, a stronger performance than it had predicted in November.

However, the country is in for tough weeks ahead with lockdown measures expected to cause output to plunge again before mass vaccination allows for an economic rebound as life returns closer to normal.

The Bank thinks that will encourage shoppers to spend more, helping the economy to return to pre-Covid levels by the end of this year or early next year – slightly earlier than it forecast three months ago when England was put into a second national lockdown.

“Covid continues to hit spending, incomes and jobs in the UK,” the Bank said in its latest inflation report. “It has put a big strain on UK businesses’ cash flow, and is threatening the livelihoods of many people.”

The central bank slashed its growth forecast for this year from 7.25 per cent to 5 per cent for this year but said growth would be stronger next year than previously thought.

“GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns,” the Bank said.

One in five adults have so far received at least one dose of vaccine, including over half of the most vulnerable elderly groups.

Policymakers predict that retired people who have been inoculated will be the first to start spending. The strength of economic recovery will depend partly on what households do with around £125bn in additional savings put away last year, a figure that’s expected to rise further over the next few months. Seven in 10 people surveyed by the Bank said they intended to keep the cash in savings. The Bank said there was evidence from businesses that positive vaccine news had already helped UK holiday bookings jump for later in 2021.

While the Bank suggested the vaccine rollout gave reason for optimism, it warned that job losses are expected to increase as government financial support is withdrawn.

More than 1.7 million people were out of a job and actively looking for work in November as the unemployment rate rose to 5 per cent. A record 370,000 people were made redundant between October and December, with some of those laid off by firms ahead of what was set to be the end of the furlough scheme on 31 October.

In addition to more job losses, the Bank expects prices to rise sharply as a VAT cut comes to an end and rising energy costs filter through the economy.

That gives Rishi Sunak a difficult balancing act to perform in his upcoming Budget. The chancellor has hinted that he is seeking ways to increase taxes and rein in public spending which has soared to cover the costs of the pandemic.

But a chorus of voices from across the political spectrum has urged Mr Sunak not to remove support too early, arguing that it could choke off any recovery and put hundreds of thousands of people out of work.

The TUC, Institute of Directors and a host of industry trade bodies have all called for the furlough scheme to be extended until the economy is growing steadily again.

Some sectors have said they need urgent additional support or businesses will fail within weeks as further rent and bills fall due while the country remains in lockdown. The Night Time Industries Association warned on Thursday that nightclubs face "extinction" this year, with more than half of venues 3 months behind on rent.

The Bank of England’s latest health check on the UK economy came as its nine-member Monetary Policy Committee (MPC) voted unanimously to keep interest rates on hold at a record low of 0.1 per cent and not to expand its £895bn money-printing programme.

The Bank stressed that a a first-ever move to negative interest rates – which has been the subject of much speculation – was not imminent.

Lenders were briefed last year to make sure that their systems were ready for sub-zero rates, a development that would mean even lower returns on people’s savings.

The most likely impact would be an “explosion” in the number of bank accounts paying zero interest on customers' deposits, said Laith Khalaf, financial analyst at AJ Bell.

He added: “Experience of negative rates in other countries suggests that even if rates turn negative, most banks wouldn’t charge high street customers to hold money in their accounts, mainly because you can always take cash out of the bank and stuff it in a mattress.”

Savers will be “breathing a sigh of relief that their hard-earned savings will not be eroded further”, said Robert Alster, chief investment manager at Close Brothers Asset Management.

“The question of negative rates has been deferred somewhat by Covid-19 vaccination optimism amidst UK’s rapid rollout,” Mr Alster said.

“The Bank of England will certainly be hoping that ‘normal’ consumption activity will revive the economy, but virus mutations and future lockdowns will be front of mind and further monetary policy support may be required.”