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Bank of England's Bailey: COVID scarring won't be as bad as past crises

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Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·2-min read
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Andrew Bailey, Governor, Bank of England, Former Chief Executive, Financial Conduct Authority, giving evidence to the Treasury Committee on the subject of the Financial Conduct Authority's Regulation of London Capital & Finance plc. Picture date: Monday February 8, 2021. (Photo by House of Commons/PA Images via Getty Images)
Andrew Bailey, governor of the Bank of England, giving evidence to the Treasury Committee on Monday February 8, 2021. Photo: House of Commons/PA Images via Getty Images

Permanent economic "scarring" from the COVID-19 crisis is likely to be less than in past economic crises, according to the governor of the Bank of England (BOE).

"There are reasons to believe that so-called longer-term scarring damage to the economy will be more limited than in some past recessions," Andrew Bailey told an online event on Monday.

“If I had to summarise the diagnosis, it’s positive but with large doses of cautionary realism."

READ MORE: Bank of England: UK economy will 'recover rapidly' thanks to vaccines

Economic "scarring" is the term for events that permanently shrink the productive capacity of an economy. Real world examples include companies going out of business or people losing their jobs. Scarring does lasting damage by reducing future potential GDP.

Bailey said government support schemes during COVID-19 had helped to preserve large parts of the economy, which should allow them to bounce back when restrictions lift. Last week's extension of the furlough scheme until September will likely lead to a lower peak in unemployment, Bailey said.

Some changes will persist post-COVID, Bailey said. Persistent changes are likely to include increased working from home and higher rates on online shopping. But businesses and workers are more adaptable now than they were in past crises, meaning adjustments will be easier.

READ MORE: Budget 2021: UK set for 'swifter and more sustained recovery'

“The longer-term negative economic effects of the Covid shock will be smaller than we have seen in the past, particularly in the 1980s and early 1990s," the governor said.

"It seems likely that task and job reallocation and capital redeployment has increased since then, for instance because workers will need less significant retraining to move between sectors."

Bailey said there was "a growing sense of economic optimism" thanks to the "huge achievement" of the UK's vaccine programme.

"There is light at the end of the tunnel," he said during an event organised by the Resolution Foundation.

READ MORE: UK unemployment rate rises to highest level since early 2016

However, he noted that the UK still faced significant economic challenges.

“We expect that by the end of the first quarter, UK GDP will still be around 12% below its level at the end of 2019, a huge shortfall," he said.

GDP is expected to rebound to pre-virus levels by the middle of 2022, but the UK still faces long-term structural issues such as poor productivity and weak business investment.

Watch: Why can't governments just print more money?