The Bank of England governor has welcomed “light at the end of the tunnel” after some promising coronavirus vaccine results but warned the UK economy faces lasting changes after the pandemic.
Andrew Bailey said developments in the fight against COVID-19 were a “big step forward”, reiterating they were encouraging and should help to lift uncertainty.
But he said the pandemic was likely to result in “structural change”, though of a different nature to the “much more painful” shake-out seen in the 1980s and 1990s.
The Bank governor also warned that the uncertainty created by the virus as well as Brexit had restrained investment.
Mr Bailey was speaking after positive trial results from two different potential coronavirus jabs lifted hopes that the end to the pandemic could be in sight – and sent stock markets soaring.
In a speech to TheCityUK conference, he said: “This is a big step forward, and it will play a major role in lowering the level of uncertainty.
“If we can now see some light at the end of the tunnel, we need to focus more on important questions about how our economies will look in the future, how we want them to look, what will be the legacy of COVID.”
The remarks come amid cautious optimism from some experts about the impact of vaccines in helping the economy return to normal more quickly, but gloom that in the short-term recovery has been slowing and GDP looks set to shrink again in the current quarter.
The Bank of England recently downgraded its UK forecast for this year – pencilling an 11% contraction in the economy – and ramped up stimulus to cushion against the pandemic’s continued impact.
But it has also been thinking about the longer term impact of the changes in behaviour wrought by the pandemic.
That includes “how what we buy has changed and the way we buy it, how the way we work has changed, and how what we make may need to change”, said Mr Bailey.
“My best guess is that there will be lasting changes… COVID may be the spur – the change agent if you like,” he added.
Mr Bailey said he was “not a pessimist on the likely degree or consequences”.
“We saw deep and painful structural change in the economy in the 1980s and into the 1990s, with a transition from heavy industry and mining to a more services oriented economy,” he said.
“That was a much more painful process, with very difficult consequences, including a sharp increase in economic inequality.”
Mr Bailey said that this time, the changes were likely to occur within the services sector – which today represents most of the economy and takes in everything from bars and pubs to call centres and solicitors’ firms.
“The prevailing level of uncertainty means there is no cause to be complacent here – and you should expect a central bank to remain cautious,” he said.