Structural changes in the economy as people change their behaviours in response to the pandemic could cause long-term “scarring” to growth and employment, Mr Bailey warned.
The Bank predicts that behavioural shifts, such as more working from home and people being more cautious about going out, will reduce gross domestic product (GDP) by 1.5 per cent every year below where it had been expected to be.
Based on 2019 output, that equates to around £1,200 per household per year below what had been forecast before Covid-19 struck.
Much of the lost output is expected to come from a mismatch in skills. In the post-pandemic world, some sectors like retail and hospitality are likely to see much bigger job losses than others, while others face a shortage of qualified applicants, leading to a mismatch that lifts unemployment higher and drags economic growth down.
“To the extent that there is structural change it is important because that’s what can result in scarring — longer term dislocation of pieces of the economy,” Mr Bailey told the Treasury Select Committee.
“It can lead to longer-term unemployment and a rise in the natural rate of unemployment for a period of time.”
Mr Bailey stressed that the economic outlook was at its most uncertain in at least a quarter of a century.
Dave Ramsden, Bank of England deputy governor, said he believed things could turn out to be worse than forecast.
“We think the level of GDP will permanently be about 1.5 per cent lower. For me, all the risks are that the it will be greater than 1.5 per cent,” he said.
One reason for this is that there will be a mismatch between people’s skills and the jobs available as some sectors are damaged more severely than others, he warned.
“As we see the next phase of the recovery unfold we will be able to see the scale of the impact on the labour market but also be able to look at the degree to which the UK economy is repurposing in response to this shock.”
One semi-permanent effect might be a fall in value of office and shop space as people work remotely.
“That commercial real estate will probably see less investment in the near future,” he said.
“Whether that will result in a less productive or a more productive economy, that’s an open question.”
As shoppers make more purchases online, companies may choose to invest more of their money in capital rather than labour, Mr Ramsden said.
That might mean getting rid of shop-floor staff to spend money on distribution centres, websites, technology and vehicles, for example.
Over time, that could lead to greater productivity, the Bank deputy governor said.
Mr Bailey said that economic forecasting has been made difficult because people will continue to show widely differing levels of caution about coronavirus and few firm assumptions can be made about vaccines, treatments and the course that the pandemic will take.
He highlighted the fact that the Bank’s central scenario for the economy has more “downside risks” than in any previous forecast. That means the Bank’s analysts think there is a significant risk that the UK economy could perform worse than the scenario suggests.
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