General position
The latest Monetary Policy Report from the Bank of England presents more data on the economic impact of Coronavirus in the UK and globally.
Economic events are connected closely to the path of Coronavirus, creating high uncertainty. However, rollout of vaccines gives reason for optimism and the Bank looks ahead to a modest recovery in 2021.
The new trade deal with the EU is welcomed but, nevertheless, trade with the EU has been weaker than usual in January 2021.
Increased trade friction is expected to continue reducing trade in goods in the long term and to weigh-down GDP growth and productivity improvement.
Recovery from Coronavirus
Economic activity in the UK has been damped-down by the ongoing Coronavirus emergency and the counter-measures taken by the government – appearance of new variants is a particular concern.
Nevertheless, rollout of vaccines offers a way forward and the Bank assumes that bio-security restrictions will be eased by the end of Q3.
Shoppers are expected to remain cautious in the first half, especially regarding “social” spending, but confidence will pick up in H2. It is not clear that “social” spending lost due to Coronavirus will be made up, however.
GDP is expected to pick up over 2021, as restrictions are eased and shopper confidence picks up, though growth will slow down again in subsequent years.
Investor sentiment seems to be improving, with demand for “risky” assets growing and equity prices rising, both globally and in the UK. Sterling has strengthened somewhat since agreement of the new trade deal.
Coronavirus, plus the effect of EU Exit, is expected to create some “scarring” effects on the economy (and, presumably, on individuals also).