The UK can see light at the end of the Covid-19 tunnel but the economy will never fully return to its pre-pandemic pattern, the governor of the Bank of England has said.
Speaking at an event organised by the Resolution Foundation thinktank, Andrew Bailey said the shifts in spending and working patterns seen since the country first went into lockdown measures a year ago would prove permanent.
The governor said the economy had been through a “traumatic experience” but predicted the scarring caused by the deepest recession in 300 years would be less than that caused by the decline of heavy industry in the 1980s and early 1990s.
Bailey said the UK needed to increase investment in order to limit the long-term damage but said the Bank would be cutting its forecast for the peak in unemployment after the decision to extend the furlough scheme until the end of September.
The Bank’s February monetary policy report predicted unemployment would peak at 7.5% later this year, but Bailey said that forecast would be updated following the budget. “My expectation would be that this is likely to reduce the peak level of unemployment over the coming months. However, some rise in unemployment as the scheme tapers will be hard to avoid.”
With a YouGov poll showing consumer confidence at its highest level since the pandemic began, Bailey said: “If I had to summarise the diagnosis, it’s positive but with large doses of cautionary realism.”
He said there was a lot of uncertainty about the extent to which the structural economic changes seen over the past year would persist, but “my best guess is that we will see some persistence, not full persistence but not a full reversion to pre-Covid either.
“We will work more from home than we used to and shop more online because new habits will persist to some degree, and to the extent they unwind it will be over a period of time.”
Bailey said the Bank was making the necessary preparations for either higher interest rates or a cut below zero depending on how the recovery from the latest lockdown evolved.
“There is a growing sense of economic optimism, in markets and in consumer and business confidence measures. The rate of new Covid infections is declining, and the vaccine programme is a huge achievement. There is light at the end of the tunnel,” he said.