According to to expert, the nation’s recovery from the pandemic will be slower and shallower than initially anticipated. He warned that Britons will be paying off the debt from the rescue packages for the next two decades.
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Ian McCafferty – who sat on the Bank’s Monetary Policy Committee (MPC) for six years until August 2018 – said if the lockdown is eased gradually in different stages as expected, the economy could take at least six months to recover.
He added that the improvement will be less abrupt than the sudden recession.
It would mean previous expectations of a ‘V’ shaped sharp bounce back in growth, or even a ‘U’ shape, may be too optimistic.
Mr McCafferty said the measures taken by the Bank and Government were “exactly what’s needed” to lift up the economy, but said there will be “fiscal consequences”.
Former Bank of England rate-setter warns of ‘fiscal consequences’ after coronavirus crisis (Image: Getty)
Mr McCafferty said that family economies and businesses will face tax increases and austerity to reduce Britain’s expanding public deficit once the emergency is over.
He said: “We will have to pay for the fiscal action that’s been required – over the next 10 to 20 years, fiscal policy will have to adapt,
“Growth will not be sufficient on its own.”
His warning comes as many fear the expected sharp rebound from the current crisis will not occur as there ano no signs of a concise lockdown de-escalation plan.
Members of the Bank’s rate-setting board have been warning of the impact the crisis will have on the country’s economy.
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His warning comes as many fear the expected sharp rebound from the current crisis will not occur (Image: Getty)
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One of the members said last week it would be the worst economic drop for several centuries.
The independent fiscal watchdog calculated the budget deficit could increase to £273 billion in 2020-21.
In that case, it would become the largest single-year deficit since the Second World War.
Mr McCafferty, a senior adviser at Oxford Economics and London Wall Partners, said the readjustment could look more like a reverse “J” with the Government attempting to reopen the economy cautiously to avoid a second wave of the outbreak.
He added that even when some industries begin to reopen, the public may be reluctant to spend money, while companies may continue to avoid investing.
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The Bank has used up its ability to cut interest rates, having already dropped to the new historic low of 0.1 percent, but is expected to release more quantitative easing (QE), likely at its next showdown in May.
The extra £200 billion of QE announced as part of the Bank’s emergency measures have been the main feature so far, according to Mr McCafferty.
“I would not be surprised to see more QE… and I think there is also more to come on the fiscal side,” said Mr McCafferty.
Meanwhile, economic prognosis group EY Item Club said the UK economy is not expected to return to its late 2019 size until 2023.
EY Item Club said the UK economy is not expected to return to its late 2019 size until 2023 (Image: Getty)
The spring projection predicted a deep, short recession this year due to coronavirus, with GDP expected to decrease 6.8 percent and consumer spending to drop by 7.5 percent in 2020 before rebounding to increase by 4.9 percent next year.
Howard Archer, chief economic adviser to the EY Item Club, said: “The UK economy is clearly in for a very difficult year with GDP expected to contract around 13 percent quarter-on-quarter in Q2.
“To put this into perspective, the largest quarter-on-quarter contraction suffered during the 2008/9 financial crisis was 2.1 percent in Q4 2008.
“Our report assumes that the Government’s measures aimed at supporting businesses and saving jobs will have a significant positive impact, which is absolutely crucial to limiting the potential longer-term damage to the economy.”