The UK economy will likely shrink by 9.5% this year, making it the biggest annual decline in 100 years, but would luckily fall behind the initial estimate of a 14% fall, the Bank of England has outlined in a forecast.
The BoE, which is holding interest rates at 0.1%, also issued an updated forecast for unemployment which the financial body said would peak at 7.5% at the end of 2020, almost double the latest rate, but lower than its May forecast of just under 10%.
The projected rise in unemployment - from the current 3.9% to 7.5% at the end of the year - is attributed to the gradual withdrawal of government-funded aid schemes.
Spending on Rise
BoE Governor Andrew Bailey pointed to the increasing recovery in consumer spending, while spending on food and energy bills remained above pre-COVID levels, he said.
Correspondingly, money spent on leisure and entertainment - non-essential segments - which accounts for a fifth of all consumer spending, remained subdued, along with business investment, Bailey noted.
Despite the latest forecast sounding more positive than the May predictions, the BoE said the UK still faced its sharpest recession on record, with the outlook for growth now "unusually uncertain".
The central bank expects the nation's economy to grow by 9% in 2021 and 3.5% in 2022, with the economy forecast to get back to its pre-pandemic levels by late 2021, provided there is no second wave of the coronavirus and new lockdowns, and that there is a smooth transition to post-Brexit economic arrangements with the EU, now being negotiated.
According to Bailey, the possibility of Britain failing to ink a trade deal with the EU by the set deadline was part of the downside risks for the economy, acknowledging though that the COVID-19 pandemic was the major challenge.
Negative Rates Floated
The Monetary Policy Committee left the BoE's policy unchanged on Thursday, with interest rates put on hold at 0.1% and its target for the total stock of asset purchases also stable at £745 billion.
The MPC said it would not even think about raising interest rates until there was "clear evidence" the rebound had started and taken hold.
It added, however, that the use of unconventional tools to stimulate the economy such as negative interest rates likewise remained under review.