Ian McCafferty – who sat on the Bank’s Monetary Policy Committee (MPC) for six years until August 2018 – said if the lockdown is lifted gradually in phases as expected, the economy could take at least six months to get back on track.
And he cautioned that the upswing is set to be less steep than the sharp contraction – meaning previous hopes of a V-shaped sharp rebound in growth, or even a ‘U’ shape, may be too optimistic.
Mr McCafferty said the actions by the bank and government were “exactly what’s needed” to prop up the economy, but said there will be “fiscal consequences”.
He said households and businesses face the grim prospect of tax hikes and austerity to cut Britain’s ballooning public deficit once the immediate crisis is over.
“We will have to pay for the fiscal action that’s been required – over the next ten to 20 years, fiscal policy will have to adapt,” he said. “Growth will not be sufficient on its own.”
His comments come as concerns mount that the sharp rebound expected from the Covid-19 crisis will not come to pass as the lockdown inflicts horrendous damage on firms, with no clear sign of an exit strategy.
Current members of the bank’s interest rate-setting committee have been alerting over the size of the economic hit – with one saying last week it would be the worst economic slump for several centuries.
The cost of the actions to keep the economy on ice have also been in sharp focus, with the independent fiscal watchdog estimating the budget deficit could soar to £273 billion in 2020-21 – the largest single-year deficit since the Second World War.
Mr McCafferty, a senior adviser at Oxford Economics and London Wall Partners, said the shape of the recovery could be more like a reverse ‘J’ as the Government looks to restart the economy in a safe way to avoid a much-feared second Covid-19 peak.
He flagged concerns that even after some sectors of the economy begin to reopen, consumers may be reluctant to go out and spend while businesses may also continue to hold back investment.
The Bank of England has exhausted its ability to cut interest rates, having already taken them down to the new historic low of 0.1 per cent, but is expected to unleash more quantitative easing (QE), possibly at its next meeting in May.
The extra £200bn of QE announced as part of the bank’s emergency measures have been the star of the show so far, according to Mr McCafferty. Whereas the rate cut has limited ability to boost consumer and business spending amid the lockdown, QE has the double benefit of boosting the economy by increasing the money supply and making it cheaper for the Government to borrow.
“I would not be surprised to see more QE... and I think there is also more to come on the fiscal side,” said Mr McCafferty.
Meanwhile, economic forecasting group EY Item Club said the UK economy is not expected to return to its late 2019 size until 2023.
The spring forecast predicted a deep, short recession this year due to Covid-19, with GDP expected to shrink 6.8 per cent and consumer spending to dip by 7.5 per cent in 2020 before rebounding to grow by 4.9 per cent next year.
Howard Archer, chief economic adviser to the EY Item Club, said: “The UK economy is clearly in for a very difficult year with GDP expected to contract around 13 per cent quarter-on-quarter in Q2.
“To put this into perspective, the largest quarter-on-quarter contraction suffered during the 2008/9 financial crisis was 2.1 per cent in Q4 2008.
“Our report assumes that the Government’s measures aimed at supporting businesses and saving jobs will have a significant positive impact, which is absolutely crucial to limiting the potential longer-term damage to the economy.”
And retailers have warned that the battered high street is in line for more disarray next year if a new rule on rates is allowed to pass through Parliament unchanged.
Chancellor Rishi Sunak won praise for his budget, in which he announced plans for a £22bn support package through grants and a business rates holiday. He also committed to a review of the system following pressure for several years from retailers, restaurants and pubs to overhaul the commercial property tax.
But due to coronavirus closing high streets across the country, retailers are concerned that the next tri-annual revaluation by HM Revenue and Customs officials, which took place in April 2019, is now wildly out of date.
The Non-Domestic Rating (Lists) Bill was introduced in the Lords by the Government on 18 March, 2020, and is due for a second reading. The tax is calculated based partly on the rental values on each property, but with a predicted 20,000 sites expected to shutter for good after the lockdown retailers worry the new rates bills for those left will be artificially high.
Andrew Goodacre, chief executive at the British Independent Retailers Association, agreed that the revaluation should be pushed back.
He said: “The current proposal would be disastrous for all businesses that pay non-domestic rates… we must have the reference point for determining future rates bills at a time post-coronavirus, so they are an accurate assessment taking into account the full impact once this crisis has passed.”