A leading member of the Bank of England has warned that the country’s economy will be heavily impacted by the effects of the COVID-19 pandemic.
Silvana Tenreyro, External Member of the Monetary Policy Committee Bank of England, made the comments in a speech to a webinar on the monetary policies needed throughout a pandemic of a level which the world is currently battling.
Ms Tenreyro, who is also Professor in Economics at the London School of Economics, said: “In a short space of time, Covid-19 and its spread around the world have moved from a potential risk to the dominating issue at home and abroad. The virus and the required containment policies have been driving movements in financial markets, as well as almost every decision for households and businesses.
“Although we do not yet have data on the overall size of the impact, we have a good understanding of the multitude of ways in which the pandemic is already affecting the economy. One difficulty in predicting the exact scale lies in assessing the combined effects of the many new policies to both contain and offset some aspects of the shock.
“But as time progresses, we are increasingly seeing the effects start to appear in more of our key economic data, as well as in additional high-frequency indicators that are being produced by colleagues at the Bank and by the Office for National Statistics.”
Ms Tenreyro added the impact was felt swiftly in economies across the world.
“As occurs following many shocks to the global economy, the effects of Covid-19 appeared early on in forward-looking financial markets,” she explained. “There have been record moves in a range of financial markets and a sharp increase in volatility, and for a period, some disruption in market functioning. Risky asset prices have tumbled globally as profit expectations have been cut and, for some companies, default probabilities have risen.”
“The virus and containment policies have had a range of effects on supply and demand in the economy, on a massive scale,” added Ms Tenreyro. “Work and consumption have ceased in a number of sectors given new public health measures and have been scaled back in many others. This will directly impact supply and demand for these sectors. These falls in activity are partly by design, of course, given necessary public health measures.
“Some economists have debated the extent to which these effects constitute a reduction in each of supply or demand. The reality is that both are likely to fall sharply in affected sectors. Indeed, not even the triggering shock could be characterised as pure supply or pure demand.
“The closure of businesses could be considered a fall in supply, as it lowers hours worked and output for those firms, even if consumers would have otherwise continued buying their products. But it seems likely that even without restrictions, demand would also have fallen sharply, or even stopped completely, in many social consumption sectors, given the increased risk of Covid-19 transmission.
“Indeed, the fall in demand was clear in high-frequency indicators such as restaurant bookings and retail footfall, which fell sharply even before the government’s decision to close restaurants and shops. Independently of how one classifies the triggering shock, the channels can affect both supply and demand.”
She added: “An important aspect of the economic effects of Covid-19 is that they will be highly asymmetric. Firms that relied on social interaction or non-essential visits have had to close down temporarily, while others that can offer services remotely or by delivery have been less directly affected. Recent analyses have highlighted the different ways spending might be affected in sectors that can remain open.
“On the one hand, firms that offer substitute products will see demand increase: for example, purchases of food from supermarkets instead of cafes and restaurants; or streaming of films or television in place of cinema trips or live entertainment. But on the other hand, all sectors will suffer from falls in demand owing to lower income and increased uncertainty elsewhere in the economy. In my view, the latter effect is likely to dominate.”