BoE's Vlieghe Warns UK Experiencing Unprecedented Economic Contraction

The UK economy is undergoing an economic contraction that is the most severe in centuries due to the coronavirus pandemic and a quick rebound is unlikely, Bank of England policymaker Gertjan Vlieghe said Thursday.

“Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries,” Vlieghe said in a speech.

Coronavirus, or Covid-19, has led to a severe supply shock and a dramatic reduction in demand at the same time, he pointed out.

“This is therefore a highly asymmetric shock, hitting some sectors in the economy drastically, while leaving other sectors financially little affected, and some even positively affected,” the rate-setter said.

“…economic downturns always hit different sectors somewhat unevenly, but the current experience is much more dramatic.”

Preliminary survey results from IHS Markit showed on Thursday that the UK private sector contracted at the fastest pace in more than two decades in April, due to the widespread shutdowns in response to the coronavirus.

The manufacturing purchasing managers’ index fell to a record low and the corresponding reading for services was the lowest since July 1996.

Elsewhere, survey data from the Confederation of British Industry revealed that British manufacturers logged the sharpest fall in output and new orders since 2009 in the three months to April.

Manufacturers expect total new orders to fall to the weakest level on record in the next quarter, with the balance easing to -78 percent, the CBI said. Business optimism plunged at a survey-record pace in three months to April, the survey showed.

“The economy’s potential is severely disrupted at the moment but, once the pandemic is over, and other things equal, in principle it should return approximately to the pre-virus trajectory,” Vlieghe said.

He said a persistent undershoot of the economy relative to its pre-virus trajectory would most likely be disinflationary.

“So the current priority for monetary policy, with a lot of help from fiscal policy, is to return the economy to that pre-virus trajectory as soon as possible,” the policymaker added.

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