Economic Perspectives –

Further signs of economic recovery, but the Bank strikes a cautious note

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses recent comments from Bank officials as well as the latest economic data.


7th September 2020


Ruth Lea CBE


In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses recent comments from Bank officials as well as the latest economic data:

  • In evidence to the Treasury Select Committee, Bank Governor Andrew Bailey noted that the Bank’s latest (August) forecasts were highly uncertain, saying that it was unclear the extent to which “natural caution” would prevent people from going back to their normal lives and “reengaging” with the economy. Concerning the “scarring” of the coronavirus recession, Deputy Governor David Ramsden suggested the economy could be more than 1.5% smaller in the long-run than otherwise would have been the case.
  • External MPC member Michael Saunders, separately, suggested that growth was likely to disappoint relative to August’s forecasts and thought additional monetary easing was likely to be “appropriate”.
  • There have been further improvements in the housing market. The Bank reported that the mortgage market continued to improve in July, though still weaker than pre-Covid. Nationwide reported a further pick-up in house prices in August, with prices at a new all-time high.  
  • There was a modest increase (£1.2bn) in net consumer credit borrowing in July, after four months of net repayments. 
  • The Markit surveys for manufacturing and services suggested a further pick-up in growth in August, but construction, whilst still showing growth, slowed.
  • The SMMT reported that new car registrations disappointed in August. They were 5.8% down (YOY).

Concerning the current debate on tax rises and public sector borrowing:

  • HMRC’s “ready reckoner” on tax changes show that the “big three” of revenue raising taxes are income tax, National Insurance Contributions, and VAT. But the 2019 Conservative Party Manifesto promised there would be no increases in income tax, NI and VAT rates.
  • The mooted increase in the Corporation Tax rate from 19% to 24% could yield £12bn, whilst aligning CGT rates with income tax rates could yield significant revenue gains.    
  • The OBR’s current projection for public sector net borrowing (PSNB) for FY2020 is over £372bn. However, ONS data for the first four months of FY2020 suggest that the PSNB is running about 15% below the OBR’s forecast. If this persists for the rest of the financial year, borrowing could be around £320bn.  

Brexit update:

  • The eighth round of UK-EU future relationship negotiations will take place on 8-10 September. There are few expectations of any major progress.

Ruth Lea said “The Bank’s August forecast was “relatively” optimistic, projecting a fall in GDP of 9½% in 2020, compared with the OBR’s central scenario decline of nearly 12½%. Recent comments by various Bank personnel have hinted that growth may be revised down in the November forecasts. There may also be more QE. These notes of caution come at a time when the economy still appears to be recovering after the cataclysmic fall in GDP in 2020Q2. However, as Government support schemes are unwound in coming months, not least of all the Coronavirus Job Retention Scheme at end-October, unemployment is expected to spike upwards, weakening the recovery.”




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Author -

Ruth Lea CBE

Ruth Lea CBE

Economic Adviser, Arbuthnot Banking Group

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

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