December 7, 2020
The coronavirus pandemic has reduced levels of economic activity across the UK this year.
Households and businesses have generally been spending and investing less, which risks significant job losses as many businesses face much lower demand.
Although household spending picked up over the summer, when social distancing restrictions were loosened, it remained well below normal levels.
Parts of the North East were subject to tighter restrictions before the tiered system was introduced ahead of the national lockdown, so our contacts in the hospitality and leisure sectors have been struggling with weak demand for some time.
Fewer tourists have been able to visit the region, and with less people working from their offices, our city centres are much quieter.
Government schemes have significantly reduced the impact on jobs, but unemployment is expected to rise further over the coming few months.
Latest figures showed unemployment at 6.7 per cent in the North East, well ahead of the UK figure of 4.8 per cent.
Although the extension of the furlough scheme has been welcomed by our contacts in the region, many are still considering further job cuts, and pay increases are few and far between.
It’s not all doom and gloom though. As fewer people have been able to go on holiday, many have used that money to spend on home improvements and the housing market has been very strong in the North East since it re-opened after lockdown.
Earlier this year, the Bank’s Monetary Policy Committee (MPC) cut Bank Rate to a record low of 0.1 per cent, where it remains. Because interest rates on many business loans and mortgages are linked to Bank Rate, businesses’ and households’ borrowing costs tend to fall when it’s cut.
The MPC has also been injecting new money into the UK economy through quantitative easing (QE).
Buying Government bonds with this new money helps keep interest rates on mortgages and business loans low. At its November meeting, the MPC announced a further £150 billion of QE, taking the total announced this year to £450 billion.
Leaving the EU Single Market and Customs Union is expected to have an impact on the economy next year, as we adjust to the new trading relationship with the EU.
But the recovery is still expected to continue steadily over the coming few years, assuming the impact of COVID-19 does fade, as households and businesses grow more confident to spend and invest.
The MPC’s analysis and forecasts are set out in detail in the Monetary Policy Report it published alongside its Bank Rate and QE decisions.
The report was published before reports of the development of an effective vaccine.
While this is good news that could dramatically reduce uncertainty for households and businesses, the future path of the economy still remains unusually uncertain.
A lot will depend on how the coronavirus pandemic develops and how governments, households and businesses respond.
Because the MPC sees substantial risks to the outlook, it has stated it does not intend to withdraw any of the support it is providing until there is clear evidence the economy is recovering.
And it stands ready to provide further support, if judged necessary.