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The UK faces a permanent £ 33bn annual shock to the economy as it emerges from the coronavirus pandemic, Bank of England Governor Andrew Bailey told MPs on Wednesday.
Structural changes in the economy as people change their behaviors in response to the pandemic could cause long-term “scars” on growth and jobs, Bailey warned.
The Bank predicts that behavioral changes, such as more work from home and people being more cautious when leaving, will reduce gross domestic product (GDP) by 1.5 percent each year below where expected.
Based on 2019 production, that works out to around £ 1,200 per household per year below what had been forecast before the arrival of Covid-19.
Much of the lost production is expected to come from a skills mismatch. In the post-pandemic world, some sectors such as retail and hospitality are likely to experience much greater job losses than others, while others face a shortage of qualified applicants, leading to a mismatch that increases unemployment and reduces economic growth.
“As long as there is structural change, it is important because that is what can result in scars: a long-term dislocation of parts of the economy,” Bailey told the Treasury Select Committee.
“It can lead to long-term unemployment and an increase in the natural rate of unemployment over a period of time.”
Bailey emphasized that the economic outlook was at its most uncertain in at least a quarter century.
Dave Ramsden, deputy governor of the Bank of England, said he believed things could turn out worse than anticipated.
“We believe that the level of GDP will be permanently 1.5% lower. For me, all the risks are that it will be higher than 1.5 percent, “he said.
One reason for this is that there will be a mismatch between people’s skills and available jobs, as some sectors will be damaged more than others, he warned.
“As we watch the next phase of the recovery unfold, we will be able to see the scale of the impact on the labor market, but we will also be able to see the degree to which the UK economy is readjusting in response to this shock.”
A semi-permanent effect could be a drop in the value of office and retail space, as people work remotely.
“That commercial real estate sector will likely see less investment in the near future,” he said.
“Whether that will result in a less productive or more productive economy, that’s an open question.”
As shoppers make more purchases online, businesses may choose to invest more of their money in capital than labor, Ramsden said.
That could mean ditching plant personnel to spend money on distribution centers, websites, technology, and vehicles, for example.
Over time, that could lead to higher productivity, the Bank’s deputy governor said.
Bailey said economic forecasts have become difficult because people will continue to display vastly different levels of caution about the coronavirus and few firm assumptions can be made about vaccines, treatments and the course the pandemic will take.
He highlighted the fact that the Bank’s central scenario for the economy has more “downside risks” than in any previous forecast. That means the Bank’s analysts believe there is a significant risk that the UK economy could perform worse than the scenario suggests.
