By Ian McConnell

The scale and nature of the economic shock from the Covid-19 pandemic have been “unlike anything in recent memory”, a UK interest rate setter has declared, while flagging the danger that “many” furloughed workers will not be reabsorbed into employment.

Silvana Tenreyro, an external member of the Bank of England’s nine-strong Monetary Policy Committee, flagged higher unemployment and “voluntary or mandated” social-distancing as key factors with potential to interrupt a “V-shaped "economic recovery.

Ms Tenreyro said in a speech to a London School of Economics webinar: “For most workers, by far the largest potential fall in income arises if they are made unemployed. And although a great number of workers have unfortunately already lost their jobs, many others have been able to maintain much of their income during the crisis via the Government’s coronavirus job retention scheme. The likelihood of large spillovers to aggregate demand will depend strongly on the outlook for the labour market over the coming quarters.”

She declared: “The latest indications from the Bank’s agents suggested a further risk that many furloughed workers would not be reabsorbed into employment as the scheme is wound down. Recent large-scale redundancy announcements are consistent with this, although the new job retention bonus may mitigate the risk for some workers.”

The monetary policy-maker, voicing her belief that there were “considerable downside risks for demand relative to supply”, said she remained “ready to vote for further action as necessary to support the economy and ensure inflation returns to target”.

Contemplating the outlook, Ms Tenreyro said: “Behavioural responses mean that the UK economic outlook will continue to depend on the global and domestic spread of Covid-19. Assuming prevalence gradually falls, my central case forecast is for GDP (gross domestic product) to follow an interrupted or incomplete “V-shaped” trajectory, with the first quarterly step-up in Q3. We are already seeing indications of a sharp recovery in purchases that were restricted only because of mandated business closures. But I think that this will be interrupted by continued risk aversion and voluntary social distancing in some sectors, remaining restrictions on activities in others, and in general, by higher unemployment.”

Ms Tenreyro noted “job losses and income reductions are likely to fall disproportionately on low-income households”. She said: “Since they tend to spend a larger share of their income, this could have greater subsequent effects on spending for those households than if the losses had been spread more equally, even if the implications for aggregate consumption may not be as large.”

She said the economic shock had been “unlike anything policymakers in this country or in any advanced economy have faced in recent memory”.