Charts 3 and 4 plot the distribution of quarterly (since 1955) and annual (since 1700) GDP growth rates in the UK, with the Bank’s May MPR scenario highlighted. By any conceivable metric, the Covid crisis has generated an extraordinary left-tail shock to the economy, with few if any historical precedents. Chart 3: Distribution of quarterly GDP growth since 1955  Chart 4: Distribution of annual GDP growth since 1700 Number of observations  Number of observations 160  50  140  45 40  120  35 100 80  May MPR 2020 Q2  60  30 May MPR 2020  25 20 15  40  10  20  5 0  0  -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19  -24-22-20-18-16-14-12-10 -8 -6 -4 -2 0 2 4  Annual GDP growth (%)  Quarterly GDP growth (%)  Sources: ONS and Bank calculations. Sources: Bank of England Millennium of Data, ONS and Bank calculations. “The Second Quarter”  The same fast indicators used to track the collapse in activity in the first part of this year can also be used to track its recovery. Generally speaking, these indicators suggest the recovery in both the UK and global economies has come somewhat sooner, and has been materially faster, than in the MPC’s May MPR scenario – indeed, sooner and faster than any other mainstream macroeconomic forecaster.
Given the depth of the recession, there is likely to be a greater than usual degree of history-dependence, or hysteresis, in this path. The deeper and longer the recession, the greater the scarring effects on physical and human capital and hence the economy’s productive potential. The May MPR scenario captured some of these scarring effects. In particular, it assumed that lower investment as a result of the Covid crisis was not recovered, leaving the capital stock 4% lower. Combined with some drag on total factor productivity (TFP) growth, the level of output ended 1½% lower. That scenario assumed no scarring effect on human capital, however, with unemployment returning to pre-Covid levels and the long-run rate of unemployment unchanged at around 4¼%. At the same time, it was recognised that this was just one of many possible paths for the economy. Other paths would give rise to differing degrees of scarring to physical and human capital and losses to the long-run productive potential of the economy. On 14 July, the Office of Budget Responsibility (OBR) will publish three possible scenarios for the economy involving different degrees of depth and length of the downturn. Perhaps the key uncertainty, from a scarring perspective, concerns the labour market. As Chart 2 illustrates, the Covid crisis has had markedly different effects on different sectors and, most likely, will continue to do so. Chart 14 compares different sectors’ contribution to the pre-Covid employment boom and its subsequent output contraction.