BOE Warns Of Historic Economic Crash

Trading Tips

Unprecedented Recession

The Bank of England had a stark message for the market when it met for its May monetary policy meeting this week. Despite holding policy unchanged at current levels, the BOE warned that the UK economy is due for an “unprecedented” crash, not seen since 1706.

While the decision to keep rates on hold was unanimous, the decision to maintain QE at current levels was more contested with the 2-9 voting for an increase in Q from £200 billion to £300 billion.

The BOE has been preparing forecast scenarios to determine the potential path of the economy in response to the fallout from COVID-19 amidst warnings that the virus is “dramatically reducing jobs and incomes in the UK”.

While the BOE is preparing for a recovery from June once the lock-down measures start to ease, it has warned that the outlook remains highly uncertain, largely due to the fact that the pace of the recovery will depend on how consumers react, warning that: “Not all of the economic activity comes back. There’s quite a sharp recovery. But we’ve also factored that people will be cautious of their own choice.

“They don’t re-engage fully, and so it’s really only until next summer that activity comes fully back.”

Under the scenario being used as a base case by the BOE, the UK is gradually eased out of social distancing measures between June and September with a technical recession being confirmed in the UK in Q2. The BOE now forecasts GDP to contract 25% over Q2 following the 3% decline in Q1.

Recovery Expected But Uncertainty Remains

Looking ahead to the rest of the year, the BOE expects the recovery to see GDP bounce back though still likely to end the year down around 14%. This would mark the sharpest recession on record for the Office of National Statistics. Indeed, the BOE itself warns that the UK will see the biggest drop in economic activity since the Great Frost in 1706 (according to modelled data used by the BOE).

Beyond there, the BOE expects that growth will rebound to 15% in 2021 though the economy will not return to pre-virus levels until the middle of next year. Furthermore, the BOE warned that even this outlook is “unusually uncertain” and very much depends on how the pandemic progresses and whether there is a further spike in cases leading to the reintroduction of lock-down measures.

Technical Views

FTSE (Bullish above 5796.4)

From a technical viewpoint. The FTSE continues to find support at the monthly pivot (5796.4). While above here, a further retest of the broken bullish trend line from 2020 lows ahead of the monthly R1 at 6253. To the downside, any retracement lower will put focus on a test of the 5456.5 level.

BOE Warns Of Historic Economic Crash

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