LONDON (Reuters) – Britain’s economy is not certain to recover rapidly once coronavirus restrictions are lifted as people may be reluctant to spend or socialise as they did before, Bank of England chief economist Andy Haldane warned on Tuesday.
Last week Britain’s budget watchdog said the economy could shrink by 35% in the second quarter but might then recover reasonably fast if curbs on everyday life were relaxed over the following three months.
Haldane said the economic shock from the coronavirus – which only started to be felt in Britain from mid-March – was enough for the economy to have contracted over the first quarter as a whole, and would lead to a “very ugly” first half of 2020.
But in line with recent comments from fellow BoE officials Silvana Tenreyro and Ben Broadbent, Haldane questioned how strong the bounce-back would be in the second half of the year.
“There will certainly be some recovery, there will certainly be a bounce. Will it bounce back immediately…? That is an open question,” he said in a podcast for the Institute for Government think tank.
“Even after those policies are relaxed, there is certainly a chance that people might be reluctant themselves to want to spend too vigorously, or to go out and socialise too much.”
Britain’s government has been loath to talk about its exit strategy for the coronavirus shutdown that began on March 23 – even as other European countries plan to reopen shops and schools – as the death toll in Britain is still climbing fast.
But some business groups have said tax cuts – for example to levies on property purchases – might be needed to jump start activity once the worst of the crisis is over.
Economists at Citi said finance minister Rishi Sunak might also consider reducing social security contributions rather than immediately trying to consolidate the public finances after a borrowing spree on a scale not seen since World War Two.
Haldane said the BoE’s 200 billion pounds of fresh bond purchases were helping to keep a lid on British government borrowing costs, but should not be mistaken for a cash handout to the government or “monetary financing” of the budget deficit.
“What’s not happening is not that the government’s running a big fiscal deficit therefore we feel duty bound to buy the bonds that finance it. What’s actually happening is that … the economy’s been hit by a colossal shock,” Haldane said.
“This is not ‘helicopter drops’ (of cash), this is simply fiscal and monetary policy acting in tandem to tackle what is a whopper of a crisis.”
(Reporting by David Milliken and Andy Bruce; Editing by Mark Heinrich)