Pandemic effects 'less severe' than feared, says bank

Despite the pandemic-induced slowdown affecting every global economy, the Bank of England predicted on Thursday that the UK slump would be less severe than expected, although the recovery might take longer than originally forecast.

Coronavirus graphic over picture of financial chart
The report from the bank's Monetary Policy Committee (MPC) coincided with publication of the IHS Markit/CIPS composite purchasing managers’ index (PMI) for the UK's service, manufacturing and construction sectors last month, which came in at 57.1 - its highest reading in five years.

UK economy expected to shink by 9.5% in 2020

According to the MPC, the economy is expected to shrink by 9.5% this year, markedly smaller than the 14 per cent slump predicted at the height of the Covid-19 outbreak. The report said the recovery had been "earlier and more rapid" than the MPC had assumed in the spring."In the MPC’s projections, unemployment rises to around 7.5% by the end of the year as some workers are made redundant and hiring remains subdued," said the report."That would represent around 2½ million people out of work and searching for jobs, the highest total since 2013, and a clear sign of spare capacity in the economy."

Bank of England governor expects UK unemployment rates to shrink to 4.5% by end of 2022

Andrew Bailey, governor of the Bank of England, told a press conference that he expected the unemployment rate to fall to 4.5% by the end of 2022 and said the bank was ready to provide more economic stimulus to boost the economy.“There are some very hard yards, to borrow a rugby phrase, to come. And frankly, we are ready to act, should that be needed,” he said.

UK construction industry: reduced anxiety about starting new projects, though new work thin on the ground

The bank's comments came on the day the PMI for the UK's construction industry showed a reading of 58.1, reflecting similar growth in indices for services and manufacturing, published earlier in the week.“Survey respondents noted a boost to sales from easing lockdown measures across the UK economy and reduced anxiety about starting new projects. However, new work was still relatively thin on the ground,” commented Tim Moore, IHS Markit’s economics director.

UK service sector shows signs of improvement

The PMI for the UK's all-important service sector, which accounts for more than three-quarters of GDP, showed a reading of 56.5 in July, up from 47.1 in June in an index where a reading above 50 represents expansion.Service providers saw activity surge after being boosted by the reopening of non-essential retailers in mid-June and a raft of leisure and hospitality businesses at the start of July.Jeremy Thomson-Cook, chief economist at money management firm Equals, said, “The headline sentiment number is indeed positive with activity in the UK’s crucial services sector expanding at the fastest rate since July 2015 supported by a surge in new orders.“The issue remains the sustainability of this recovery given the increase in sectoral redundancies and a likely cessation of wider investment until the horizon is seen more clearly, with anything from further lockdowns to Brexit confusion likely to keep businesses in a state of caution.”

European service sector also shows an increased PMI

The services recovery in the UK was mirrored in IHS Markit’s PMI for the sector in the eurozone where increased domestic saw the reading increase from 48.3 in June to 54.7 last month.Chris Williamson, chief business economist at IHS Markit, said, "Eurozone service sector business activity rebounded in July to grow at a rate not exceeded for over two years. France and Germany enjoyed especially strong gains, though renewed growth was also recorded in Spain and Italy as Covid-19 containment measures continued to be relaxed."Combined with a surge in manufacturing production, the renewed expansion of the service sector bodes well for the economy to rebound in the third quarter after the unprecedented slump seen in the second quarter."Whether the recovery can be sustained will be determined first and foremost by virus case numbers, and the recent signs of a resurgence pose a particular risk to many parts of the service sector, such as travel, tourism and hospitality."

Read more news and views from David Sapsted.

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