June 25, 2020 / 9:10 AM / 19 days ago

Worst may be over for battered British economy - Reuters poll

LONDON (Reuters) - Britain’s economy is shrinking at its fastest pace in centuries as the devastation wrought by the coronavirus pandemic saps demand, but it’s likely to bounce back to growth next quarter as more businesses reopen, a Reuters poll found.

FILE PHOTO: The Canary Wharf financial district is seen from the construction site of 22 Bishopsgate in London, Britain June 25, 2019. REUTERS/Hannah McKay

An historic downturn pushed the Bank of England to unleash unprecedented amounts of stimulus, and while it has slowed the pace of purchases, it is likely to increase its total spending again, the June 19-24 poll predicted.

The coronavirus has infected around 9.3 million people globally and Britain has the highest related death toll in Europe, despite a government-imposed lockdown that forced businesses to close their doors and citizens to stay home.

Although the number of cases reported daily is dropping in Britain, a second wave of coronavirus infections was given as the biggest threat to the economic outlook, according to over three-quarters of respondents to an additional question in the poll.

As activity ground to a near-halt after the March 23 lockdown, the poll predicted the economy would contract 17.3% this quarter, not quite as bad as the 17.5% fall forecast in May. Forecasts ranged from to a 6.3% drop to 25.5%.

In a worst-case scenario it will shrink 19.0% this quarter, according to median forecasts.

But like other countries around the world, Prime Minister Boris Johnson has slowly started to ease lockdown restrictions and the economy was expected to bounce back and grow 10.5% next quarter as a result.

“April was undoubtedly the low point in activity. We’ll probably see a more pronounced rebound during the third quarter as a broader range of businesses are expected to reopen,” said James Smith at ING.

“But even then, the economy will remain well below its pre-virus size, and we don’t think it will be until late 2022 or 2023 until it has returned to those levels.”

This year, the economy will contract 8.7%, medians in the poll of nearly 80 economists showed, and then grow 5.5% next year.

To support the economy, the Bank of England has cut its key interest rate to a record low of 0.10% and restarted asset purchases, or quantitative easing (QE). Last week, it bolstered its firepower by a further 100 billion pounds ($125 billion).

Only one member of the Bank’s Monetary Policy Committee - Chief Economist Andy Haldane - voted against the increase as he thought there was evidence a recovery was already taking shape.

While the Bank surprised financial markets by saying it expected the latest asset purchases increase to see it through to the end of the year, 26 of 35 respondents to an additional question said it was not yet done with easing. All of those said it would again add more QE.

“The MPC won’t decide on more until November or December. By that point, we suspect Haldane’s hopes will have been dashed, unemployment will be much higher, and inflation will still be well below the 2% target,” said Andrew Wishart at Capital Economics.

“We suspect that the MPC will eventually increase the stock of QE from 745 billion pounds to a shade under 1 trillion pounds.”

No change in Bank Rate was predicted until 2023 at the earliest.

TRANSITIONING

Britain’s transition period after leaving the European Union is due to expire at the end of December, and despite the havoc caused by the coronavirus pandemic, Britain has repeatedly said it would not ask for an extension.

But just over three-quarters, 26 of 34, of respondents to an additional question said it should be extended.

“Ruling out an extension to the transition period is a foolish move by a government that does not appear to be acting in the economy’s interests,” said Peter Dixon at Commerzbank.

Still, as has been consistent in Reuters polls since the June 2016 vote to leave the EU, economists expected the two sides to agree on a trade deal.

“Without an extension of the transition period, the UK risks exiting the EU with only a bare bones deal at best,” said Martin Weder at ZKB. “In combination with the deep recession in the UK and the government’s poor record in handling the pandemic, this results in a very bleak economic outlook.”

Reporting by Jonathan Cable; polling by Hari Kishan and Sumanto Mondal; editing by Larry King

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