London’s streets standing deserted at the height of the lockdown will be the defining image of the sheer enormity of how hard the pandemic hit Britain’s economy, according to former Bank of England heavyweight Sir Charlie Bean.
Like the lines of people queuing to withdraw money from Northern Rock before its dramatic collapse in the financial crisis over a decade ago, seeing normally-bustling Trafalgar Square left empty will stay with him as a symbol of the devastating economic consequences of Covid-19.
Speaking to the PA news agency, Sir Charlie – former Bank of England deputy governor and current member of the UK’s fiscal watchdog – said the “notion of closing down large chunks of the economy is a huge and unprecedented step”, and one he never expected to see in his lifetime.
Having served at the Bank under Governor Lord Mervyn King throughout the financial crisis, Sir Charlie witnessed events that brought the banking system and global economy to its knees.
“At the time we thought that was a once in 100 – or even 200 – year event,” said Sir Charlie.
“We’ve now had two extreme events happening in the space of a little over 10 years.”
While the financial crisis had a long and painful impact on the UK, it pales in comparison with the economic shock and the cost of the coronavirus crisis so far.
Covid-19 sparked the biggest fall in UK gross domestic product (GDP) – a measure of the size of the economy – for more than 300 years in 2020, sending it plunging by a record 10%.
That is twice the size of the contraction caused by the financial crisis and the Great Recession that followed.
Sir Charlie – one of the committee members at the Government’s independent forecasters, the Office for Budget Responsibility (OBR) – said while there had been previous financial crises to provide a template for action back in 2008, there was no handbook for a health crisis on this scale.
This presented challenges not only to fledgling Chancellor Rishi Sunak, but also to the likes of the OBR and the Bank of England – both looked to their forecasts on the expected economic impact.
Sir Charlie revealed that during the initial number-crunching for the size of the economic shock the UK was facing, the official forecasters were left wondering “could it really be that big?”.
He admits the OBR “over-egged” the predicted decline in GDP at the start of the crisis, when it warned the economy could fall by as much as 35% between April and June.
It did, however, still fall by an eye-watering 19%.
Sir Charlie said the strength of the Government’s response to the pandemic has been one of the biggest surprises of the past year, having launched an “astonishing” £400 billion of Covid-19 support measures.
Likewise, he said the furlough scheme, which has cost £54 billion so far, and at one stage covered the bulk of the wages for almost a third of Britain’s workforce, was “almost unheard of”.
The Bank of England helped cushion the blow of the economic shock by slashing interest rates from 0.75% to the all-time low of 0.1%, while expanding its quantitative easing (QE) programme to a mammoth £895 billion.
Sir Charlie, who is also a professor at the London School of Economics, said while monetary policy “played a supportive and helpful role … this was a time for governments to step up to the plate and the Chancellor has done that in spades”.
This has not come without its cost, with government borrowing predicted by the OBR to reach a peacetime record of £355 billion in the year to the end of March – equivalent to 17% of the UK’s national economic output.
Despite the blunderbuss approach to pandemic support, Sir Charlie said it will not be enough to prevent some unavoidable long-term scarring.
The OBR is predicting the UK economy will be 3% smaller in five years due to the crisis than it would have been, but it could be as much as 6%.
Official data for January shows 726,000 fewer workers on payrolls since the start of the pandemic, even with the furlough support, and the OBR predicts the unemployment rate will soar to a peak of 6.5% by the end of 2021.
The impact has been unequal through the economy, with some sectors thriving while others – such as retail and hospitality – have been decimated.
Faced with this and the long-term consequences of the pandemic, Mr Sunak now faces considerable “new challenges”, Sir Charlie warned.
“He needs to support the recovery … but getting the timing right is important and making sure the economy rebounds at an appropriate rate – not too fast and not too slow,” he said.
Sir Charlie and his colleagues at the OBR are predicting a strong bounceback in the economy thanks to the rapid rollout of the vaccine programme.
While forecasters are keen to stress the uncertainties that remain in this pandemic, there is hope that by the end of 2021, the sights of Trafalgar Square standing empty will be firmly consigned to history.