Bank of England Governor Andrew Bailey told lawmakers on Wednesday that the UK is facing a sustained £ 33bn annual economic blow as the country emerges from the coronavirus pandemic.
Mr. Bailey warned that structural changes in the economy, when people change their behavior in response to the pandemic, can cause long-term “scars” to growth and employment.
The bank predicts that changes in behavior, such as an increase in the number of home workers and a more cautious attitude towards going out, will contract gross domestic product (GDP) annually by 1.5 percent below expected levels.
Based on 2019 results, this translates to around £ 1,200 per household per year, below predictions prior to Covid-19 infection.
Most of the lost production is expected to be due to skill mismatches. In a post-pandemic world, some sectors, such as retail and hospitality, are likely to see much more job cuts than others, while others will face a shortage of qualified candidates, leading to a mismatch that will lead to increased unemployment and slowdown in economic growth.
“To the extent that structural change is taking place, this is important because it can lead to scarring – a longer-term dislocation of parts of the economy,” Mr. Bailey told the Treasury Special Committee.
“This can lead to long-term unemployment and an increase in the natural rate of unemployment over a period of time.”
Mr. Bailey stressed that the economic outlook was the most uncertain in at least a quarter century.
Dave Ramsden, Deputy Governor of the Bank of England, said that, in his opinion, things could turn out to be worse than forecasted.
“We think that the level of GDP will be constantly lower by about 1.5 percent. All the risks for me are that it will be more than 1.5%, ”he said.
One reason for this is that there will be a mismatch between the skills of the people and the jobs available, as some sectors will be more damaged than others, he warned.
“As we see the next phase of recovery unfold, we will be able to see the magnitude of the impact on the labor market, but we will also be able to gauge the extent to which the UK economy is redeveloping in response to this shock.”
One semi-permanent effect can be a drop in the value of office and retail space as people work remotely.
“There will probably be less investment in this commercial property in the near future,” he said.
“Whether this will lead to a less productive or more productive economy is an open question.”
As shoppers shop more online, companies may choose to invest more of their money in capital rather than labor, Mr. Ramsden said.
This can mean, for example, getting rid of shop floor personnel to spend money on distribution centers, websites, technology, and cars.
Over time, this could lead to increased productivity, according to the bank’s deputy governor.
Mr Bailey said economic projections were difficult because people will continue to exhibit vastly different levels of caution about the coronavirus and few firm assumptions can be made about vaccines, treatments, and the course of the pandemic.
He highlighted the fact that the Bank’s central scenario for the economy carries more “downside risks” than any previous forecast. This means that Bank analysts believe there is a significant risk that the UK economy could perform worse than the scenario suggests.
