UK GDP has recovered fairly rapidly in aggregate so far from its trough earlier in the year. In our August Monetary Policy Report forecasts, we projected that recovery to continue, though at a slower pace. Unemployment was projected to peak in Q4 and decline only gradually. And inflation was projected to return to target from its current low level as domestic price pressures picked up. (Figures 11-13) Those projections were conditioned on the assumption that the direct impact of Covid-19 on the economy would dissipate gradually over the forecast period, as well as on market interest rates and the monetary and fiscal policy support measures that were in place at the time. This summary is in no sense intended to downplay the unprecedented impact the virus continues to have on individuals, on particular businesses and sectors, and on different regions and nations of the UK at different times. As flagged in the MPC’s September Minutes, there is a real risk of a more persistent period of higher unemployment, and the recent strength in income growth might not be sustained. I remain particularly concerned that we could also see structural headwinds to recovery in the labour market, with particular impacts on younger workers and those joining the workforce. The negative impact on the supply side of the economy, or degree of scarring, could potentially be greater than the 1½% we have assumed to date based on very preliminary work, a risk the MPC has previously highlighted.

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