(Bloomberg) -- The U.K. economy could be stronger than output data suggest as consumers switched their spending in response to the pandemic, according to Bank of England Deputy Governor Ben Broadbent.
The difficulty in responding to large and rapid shifts in demand may mean the impact on inflation may also have been softened, he said in a webinar Tuesday. However, he said the anticipated steep rise in unemployment when government furlough programs wind down indicates that the central bank’s policy response was appropriate.
“This is quite unlike any normal economic cycle,” Broadbent said. “GDP growth may have been the weakest on record, but retail spending growth is just about the strongest.”
He spoke after data from Barclaycard showed a surge in online spending in December even as high street retailers and hospitality were hit by Covid-19 restrictions in the vital holiday period. Consumer spending fell 2.3% from a year ago overall but online retail climbed 52%, with grocery spending on the internet jumping 88%.
“Whether because of people’s own natural caution, or the official lockdowns, spending on anything that involves physical proximity to other people has had to be cut significantly,” Broadbent said. “But cutting back on these activities doesn’t necessarily mean a similar decline in total consumption.”
Fourth quarter GDP was probably around 10% lower than a year earlier, he said. But much of the drop is down to a reduction in public services, which don’t affect consumers’ ability to spend.
That makes it harder than usual to understand how much slack there is in the economy, and will also make it difficult to judge how quickly the slack will be absorbed in the recovery. Unemployment remains the best guage of slack, he said.
U.K. job cuts jumped to the highest on record in the three months through October, even before state wage support winds down. The number of people on payrolls was 819,000 below pre-pandemic levels in November, with over a third of the fall coming from the hospitality sector, one of the areas hit hardest by lockdowns to control the virus.
The BOE will continue to set policy in order to achieve its remit over the medium term, he said.
Policy makers are still studying how negative interest rates might work in the U.K., he said. If they decide to use them, they would want it to reduce lending rates, but that would also hurt banking margins, he said.
“That’s where the judgment lies” on whether a sub-zero policy would be beneficial, he said.
(Updates with Barclaycard report in fourth paragraph)