11 March 2020
The BOE had earlier made an emergency rate cut of 50 basis points and announced a new funding scheme aimed at supporting small and medium-sized enterprises (SMEs) exposed to the coronavirus shock. The Bank also announced the release of the countercyclical capital buffer that will support up to £190 billion of bank lending to businesses, equivalent to 13 times banks’ net lending to businesses in 2019.
This is a decisive move by policymakers who are scrambling to address the potentially wide-ranging fallout for the economy as the virus continues to spread rapidly. Both the outgoing governor of the BOE, Mark Carney, and Sunak emphasised a "maximum impact" expected from the "big package" for the economy, which is facing the prospect of "significant" disruption from the coronavirus.
While it may indeed represent one of the "most comprehensive" virus-response packages we have seen globally so far, at least based on the headline, the high degree of uncertainty around coronavirus outcomes makes it difficult to gauge whether the new policy measures are going to be enough to avert a recession this year.
The best-case scenario for the economy - at this point - seems to be a technical recession, that is a 1-2 quarter economic contraction, followed by a rebound towards the latter part of the year. In that case, it might still be possible for the economy to deliver positive growth for the full year of 2020, although achieving the Office of Budget Responsibility’s (OBR) outdated forecast of 1.1 per cent is verging on impossible.
A more realistic scenario for now is zero GDP growth in 2020. But depending on how fast and wide the virus spreads, how aggressive preventative measures are, and how effective policies are in addressing the outbreak, there is still a wide range of outcomes for the next few quarters - with risks firmly skewed to the downside. On the effectiveness of measures specifically, it is worth noting that although sick pay coverage has been extended, the level of sick pay remains possibly a bigger issue.
Turning point on fiscal policy
While the Chancellor has claimed not to have departed from the fiscal rules which were set just a few months ago, this is clearly a stretch. This latest budget is based on outdated, overly optimistic growth forecasts, and does not reflect coronavirus measures and BOE emergency action. With the review of the fiscal framework now under way, it seems likely that this will mark a turning point for the fiscal policy stance in the UK - away from focusing on cutting the level of public debt towards more flexible fiscal rules which would ultimately result in a much higher debt burden.
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