By Kristy Dorsey

Financial experts have questioned the “overly-optimistic” outline in which the Bank of England has laid out how the UK might experience a sharp economic rebound in 2021.

In what it described as an “illustrative scenario” – rather than its standard economic forecast – the central bank warned in its latest monetary policy report that the UK appears headed for its worst economic slump in more than 300 years, with measures to contain the coronavirus pandemic leading to as much as a 25% decline in GDP during the three months to the end of June. For 2020 as a whole, output risks shrinking by 14%, the biggest slump since 1706.

But the BoE’s grim take on the situation did include something of a silver lining in that it laid out a series of circumstances under which the UK economy could bounce back by as much as 15% in 2021. That assessment rests on a number of assumptions, beginning with the easing of lockdown restrictions from the beginning of June.

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“The Bank’s forecast on a rapid economic recovery in 2021 and beyond with the level of activity returning to somewhere close to the pre-crisis trend level by 2023 is optimistic,” said Luke Bartholomew, economist at Aberdeen Standard Investments.

“We see the economy at least 5% smaller than it otherwise would have been before the virus struck by the end of 2023.”

The central bank has warned that unemployment looks set to double to 9% in the second quarter, with a 5% fall in wages to below 2007 levels. Company sales are expected to be approximately 45% lower than normal in the second quarter, with business investment down by 50%.

John Westwood, managing director of Blacktower Financial Management Group, said even worse was still to come.

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“Adding the above pressure on top of the pending Brexit timetable is set to catapult the UK into a frenzy,” he warned.

“Now is the time for the UK Government to be transparent, offering detailed information on their plan after Covid-19 and their Brexit strategy. Uncertainty will be the last thing we need as an economy.”

One of the multiple assumptions underlining the BoE’s scenario for a sharp recovery in 2021 is an “immediate but orderly move to a comprehensive free trade agreement” with the EU on January 1. Senior Scottish economist Jeremy Peat said that appears unlikely.

“Certainly no one in the EU seems to anticipate that is a strong probability,” he said.

Mr Peat noted that in the Bank’s central scenario, household consumption falls by 14% in 2020, but rallies by 15% in 2021. Similarly, business investment revives by 19% and 12% in 2021 and 2022 respectively, following a plunge of 26% in the current year.

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Such a rebound in spending is questionable, as individuals and companies alike will be coping with the overhang of uncertainty as the economy attempts to regain its footing. The situation will be further exacerbated if there is a new spike in coronavirus infections once lockdown measures are eased. The BoE scenario assumes this will not happen.

“I believe we could get (a recovery) that is much more gradual and drawn out into 2022, rather than it all happening in 2021, as the Bank is assuming,” Mr Peat said.

The BoE’s forecast presumes that enforced social distancing measures remain in place until early June, and are then “lifted gradually over the following four months”. Every two extra weeks of lockdown is expected to cost about 1.25% of GDP in the short-term, along with a 0.75 percentage point rise in unemployment.

The nine-member Monetary Policy Committee voted to keep rates at their current all-time low of 0.1 per cent, and left the target for bond buying at £645 billion.