Coronavirus: A 14% fall in GDP would be unprecedented

It is hard to get one’s head round numbers like these.

A 14% fall in gross domestic product. We’ve never seen anything like that in our lifetimes.

Nor have we seen a 15% rise in gross domestic product – you have to go back to the earliest days of capitalism, the first decade of the 18th century, to see anything like this.

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Yet these are the numbers at the heart of the Bank of England’s latest scenario for how the economy might perform in 2020 and 2021 respectively.

It’s worth emphasising that word “scenario” at the start.

Source: BoE/ONS

This is not a forecast of the kind the Bank normally produces, with probabilities attached to outcomes, with fan charts and with a clear path for where it expects the economy, inflation, unemployment and so on to go, and there’s a reason for that.

The scale of uncertainty is simply so high at the moment: producing even a “best guess” forecast would append a spurious illusion of certainty to the numbers.

So instead the Bank is producing a “scenario” much as the Office for Budget Responsibility did last month.

But this time around the scale of the annual changes in GDP are even greater than those mapped out by the OBR.

The good news is that while some had expected the Bank to warn of permanent “scarring” from the lockdown, with economic growth never getting back to “normal” levels, the Bank actually expects the economy to get back to close to its pre-crisis trend by the end of 2021.

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In other words, it may take some time but the Bank does think we will mostly get there, give or take some business investment which gets lost along the way.

However it points out, in what will be seen as a warning shot to Britain’s banks, that the biggest risk facing the economy is that the banking system stops lending, causing a wave of insolvencies as the UK attempts to recover from the effects of the lockdown.

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In short, it is expecting an extraordinary ride for the economy in the coming year or two, but that after this rollercoaster experience in which GDP collapses and then recovers and unemployment spikes and then falls, we will be back in a more or less “normal” economy when it’s all over.

Some economists would say that is an overly optimistic assumption.

But given the Bank says part of the reason for this profile are the extraordinary measures carried out by the Treasury – everything from lending schemes to companies to the furlough scheme for employers – the Chancellor might actually find this scenario something of a relief.

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