“A couple of Quarters of growth is not going to be enough”

“It’s been a completely unprecedented economic downturn; the economy has fallen deeper and faster than at any time for as long as we have records and we have records going back several hundred years.”

That was the start of TheBusinessDesk.com’s conversation with Dr Gertjan Vlieghe from the Bank of England’s Monetary Policy Committee, the group responsible for making decisions about Bank Rate.

Vlieghe has been on a virtual tour of Yorkshire to look at the impact of the pandemic. He explains the situation in Yorkshire is mirrored across the UK.

He said despite the economy being in a “significantly ” better place than where we were in April/May 2020, it is still 10% below “where we need to be”.

He added the challenge with this downturn is that it was so unevenly distributed, meaning some sectors “literally went all the way down to zero” – like the hospitality, travel and leisure industries – while other sectors faired better.

He said that dichotomy was visible particularly in places such as Yorkshire, where the visitor industry makes up a significant proportion of the economy and suffered tremendously, but the food production industry did “relatively okay”.

He explained it was this variation amongst sectors which meant that unlike previous downturns the recent one had required much more of a fiscal policy approach.

“It’s really only fiscal policy that can target the sectors that have been very badly hit, whereas monetary policy can stimulate the economy as a whole if it needs it, or put the brakes on as a whole if necessary.”

Vlieghe said the unique nature of this downturn means he expects to see, “some very strong growth quarters in the next few quarters” – although it is to some extent dependent on the vaccination programme.

However, strong growth quarters do not mean the economy doesn’t need ongoing support from monetary policy.

Vlieghe said: “What we’re ultimately trying to achieve is to bring back the economy all the way to its medium-term potential. Or to put it another way we need the labour market to return roughly to the state that it was in immediately before the pandemic.”

This he says is going to take a while even if we have rapid growth, because it means we need the unemployment rate to fall “quite far”.

As a result, he said he doesn’t expect many changes to policy in the near future.

He said: “My main message is don’t think of the bank rate being linked to short-term growth in the economy, as that’s not enough.

“Just because we’re going to have a couple of quarters of growth rates that may be unprecedented doesn’t mean the Bank of England should change its monetary stance and step on the brakes because everything is ‘great now’.

“We need everything to grow very fast because we need to close that gap, relative to the trajectory that we were on before.”

He added the only way to deliver 2% inflation sustainably is to get the economy back to full capacity and get the unemployment rate down.

However, he reiterated that there may be temporary spikes in inflation during the reopening and that it may have some impact on energy prices and therefore some cost increases.

“One-off price increases is not what we mean by inflation,” he said. “Inflation is the kind of pressure you see year after year.

“To my mind, seeing some strength this year, which I do expect, is not going to be nearly enough to then conclude this is an economy that doesn’t need monetary help anymore.”

Vlieghe said his virtual tour of Yorkshire has shown one thing is clear. Everyone – both businesses that have done well over the last 12 months and those which have struggled – are “ready to take advantage of both short-term opportunities” but are also looking now to the longer-term.

He said the view from business is encouraging and he expects many of these firms will benefit from the “historically unprecedented growth rates” which the Bank of England is forecasting.