The adoption of technology solutions will ease the scarring inflicted by COVID-19
In life, timing is everything. Andrew Bailey’s first day as Governor of the Bank of England was March 16: one week before Boris Johnson locked down the United Kingdom in a bid to quell the COVID-19 pandemic. The 61-year old admits it has been a “pretty strange” start to his tenure but says the BoE is using “technology extremely efficiently” and urges other businesses to embrace tech solutions in order to speed up the economic recovery in the coming weeks and months.
On March 7, the BoE warned that unemployment in the United Kingdom would double and the economy would shrink by 14 per cent this year, thanks to COVID-19. However, the BoE suggested that a recovery of 15 per cent in 2021 was possible, though that scenario was contingent on a number of factors.
Mr Bailey revealed on May 14, at a session at The Global Boardroom, a virtual event organised by The Financial Times, that he believes the country will suffer permanent – though currently unquantifiable – “scarring” from the widely predicted recession. He added that he did not know yet whether the Bank’s forecast of a 25 per cent drop in output in the current quarter would be overly pessimistic or excessively positive.
Recently the BoE has slashed interest rates to a record low of 0.1 per cent as part of its response to the coronavirus pandemic. But while not explicitly ruling out negative rates, Mr Bailey acknowledged such a move would be “a very big step”, and not something that the nine-strong monetary policy committee was contemplating at the moment.
Here follows some of the key points from Thursday’s interview with Chris Giles of the Financial Times.
“We are in a major downturn” – but data is helping
“There is massive uncertainty at the moment. Like lots of organisations, we’ve invested a lot in high-frequency data. Interestingly, the Bank had actually already done this in the context of its preparations for a hard Brexit exit, so [we have] come into this reasonably well set up. We are in a major downturn, no question of that whatsoever.”
Government schemes will help the recovery
“There are arguments for why this [recession] will be different [to previous recessions]. It’s not a recession that’s been tipped in through a particular, unique economic development. It is a non-economic divot [whose] underlying cause [has led] the economy to close. It’s reasonable to think that there will be, over some period of time, a reopening of the economy.
“It’s also in our view reasonable to think that policies like the job-retention scheme – which are there to preserve people’s livelihoods and incomes and prevent a bigger rise in unemployment – will lead to a restoration of employment more rapidly than you would get with hypothetical ‘normal’ routes out of a recession.”
On “scarring” – it might not be so bad if confidence grows
“There’s a huge amount of uncertainty I think around any assumption on [scarring]. I think there’s reason to believe that … we can imagine that a lot of jobs and a lot of activity will come back at the point when the restrictions are lifted and people get confident about going about their daily lives and their jobs. And if that does happen in a way that restores activity then we will get less scarring in the sense that fewer firms will fail, there’ll be less unemployment.
“But I have to be clear, there are obvious routes to getting scarring. Firms can fail because they were over-indebted before the crisis happened. They could also find that they’re operating in markets where, when we come out of the crisis, people’s pattern of demand has changed, because we’ve all gone through a pretty massive experience.
“But if the technology does enable a route out of that, and … if we can in a sense get through the confidence of effects of any second wave that may or may not happen, then I think there are reasons to believe that the economy and life will come back on stream.”
No to negative rates – for the moment
“Quite a lot of other central banks are in the same place; it is not something that we are currently planning for or contemplating. It would not just be a matter of the Monetary Policy Committee sitting down in a room and saying ‘let’s do it’. There is quite a lot of structural issues that you would have to do around it. And that would take some period of time. My view is that it would require – if we were to consider it – quite an extensive communications exercise. As a reaction / expectations point of view, it is a very big step.”
High inflation is not a worry
“I don’t think [unprecedented fiscal stimulus] is going to bring on high inflation. I don’t think that we see the evidence that there is going to be a rapid rise of inflation in the current context. Now that’s not to say that we are in any sense relaxed about that, we’re doing all the work that we would always do to watch for that, but I don’t see that as a major risk at the moment.”
The importance of testing, tracking and tracing COVID-19
“I’m a very strong supporter of the work the Government is doing – [indeed] all governments are doing – to implement systems to test, track and trace [COVID-19], and to find a vaccine. That’s the thing that we all want to see, not just as citizens, but because that will be the biggest benefit to the economy. That’s going to create the most degree of confidence so my hope is that we can get to that point [as soon as possible].”