Bank of England Governor Andrew Bailey told MPs on Wednesday that the UK faces a permanent annual £ 33 billion blow to the economy as it emerges from the coronavirus pandemic.
Bailey cautioned that structural changes in the economy, where people change their behaviors in response to the pandemic, could cause long-term “scars” for growth and employment.
The bank predicts that behavioral shifts, such as an increase in work from home and people being more cautious about going out, will reduce GDP by 1.5 percent annually less than expected.
Based on 2019 output, this equates to about £ 1,200 per household per year less than what was expected prior to Covid-19.
A large portion of the lost outputs is expected to come from a skill 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 drives up unemployment rates and delays economic growth.
“To the extent that there is structural change, it is important because this can lead to scarring – the long-term disintegration of parts of the economy,” Bailey told the Treasury Select Committee.
“It could lead to long-term unemployment and a rise in the natural rate of unemployment for a period of time.”
Bailey stressed that the economic outlook has been the most uncertain for at least a quarter of a century.
Dave Ramsden, deputy governor of the Bank of England, said he thinks things could get worse than expected.
We believe that the level of GDP will permanently decrease by about 1.5 percent. For me, all the risk is that it’s going to be greater than 1.5 percent.
He warned that one of the reasons for this is that there will be a mismatch between people’s skills and available jobs as some sectors are affected more than others.
“As we see the next phase of the recovery unfolding, we will be able to see the magnitude of the impact on the labor market but also be able to look at the degree to which the UK economy is turning into targets in response to this shock.”
One of the semi-permanent effects could be the depreciation of office and store space as people work remotely.
“It is likely that commercial real estate will see less investment in the near future,” he said.
“Whether this will lead to a less productive or more productive economy is an open question.”
Ramsden said that as shoppers make more purchases online, companies may choose to invest more of their money in capital rather than labor.
That could mean getting rid of store employees to spend money on distribution centers, websites, technology, and vehicles, for example.
The deputy governor said that over time, this could increase productivity.
Bailey said that economic forecasting has become difficult because people will continue to demonstrate widely varying 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 carries more “downside risks” than any previous forecast. This means that bank analysts believe there is a high risk that the performance of the British economy may be worse than the scenario suggests.