MNI INTERVIEW: Covid Will Scar UK Economy, OBR's Bean Says

The UK economy is likely to emerge deeply scarred from the Covid shock despite good news on vaccines, former Bank of England Deputy Governor Charles Bean told MNI, pointing to potential hits to productivity growth from corporate debt overhangs, skill shortages and a shrinking labour force.

The Office for Budget Responsibility has sketched out an upside scenario of no economic scarring and a return to pre-Covid trend growth to materialise, but this looks unlikely, said Bean, now a senior official at the OBR.

"Even if we are on something like the upside scenario, with quite a quick return to normal activity, that doesn't rule out having permanent long-run effects because you have significant disruption to investment plans, to innovation and you don't necessarily get all of that back," he said in an interview in which he also commented on the BOE's expansion of quantitative easing.

Precise predictions of the potential fall in trend growth are very hard to make, he said, noting that a BOE estimate published this month of 1.75% is well above consensus. Even the vaccines are far from guaranteeing a full recovery, he said.

"If we can assume they are successful and rule out (Covid) mutations, so you rule out a third wave and a really long lasting (pandemic), if the economy is really getting back to normal and people are going back to the theatre, and football matches and pubs and all of that by next winter then it would be reasonable to think that the scarring effect may not be that huge," Bean said.

"The one thing you shouldn't believe is somebody who says it is going to be one-and-three-quarters, definitely," he added, noting that many observers mistakenly pointed to a return to trend growth after the 2008 financial crisis.

TREND GROWTH

A return to trend growth happens "when you have normal business cycle fluctuations. It is less clear when you have … something like this, which is a very big supply shock as well as a demand shock and has changed people's perceptions of the risks out there in the world, that you are necessarily going to go back to that pre-virus trajectory," he said.

The OBR published a central forecast showing output five years down the line still 3% below the pre-pandemic trajectory or 6% below on its downside scenario. The IMF has it at close to 5% below trend and a median forecast in one compilation the OBR cited was 3%, leaving the BOE's estimate as a rosy outlier.

Bean cited a list of factors weighing on a rebound in productivity. There is already evidence of older workers leaving the labour force and net inward migration has halted, combining to shrink the workforce. At the same time, a shift to new business models requires re-training and creates skill shortages.

The BOE produced its latest set piece forecasts early in the month, as positive vaccine news was just emerging, while the OBR had a little longer to factor it in and consult with the scientific community. The logistical challenges of mass vaccination and the risk of significant virus mutations, such as the one in mink in Denmark, were all cited as problematic.

"We would still want to say 'yes, unalloyed good news about the vaccines' but it doesn't mean we are home and dry and on the upside scenario. We still need an awful lot of good things to go well," Bean said.