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The UK economic slump caused by Covid-19 will be less severe than expected, but the recovery will also take longer, the Bank of England has said.

The faster easing of lockdown measures and a “more rapid” pick-up in consumer spending meant the economy rebounded earlier than it had assumed in May.

Spending on clothing and household goods were back to pre-Covid levels.

However, the Bank warned of a “material” rise in unemployment this year as it held interest rates at 0.1%.

Governor Andrew Bailey said recent data suggested the recovery in consumer spending was gaining traction, while spending on food and energy bills remained above pre-Covid levels.

He said: “We have had a strong recovery in the last few months. The pace puts the economy ahead of where we thought it would be in May.”

However, Mr Bailey cautioned against reading too much into recent data: “We don’t think the recent past is necessarily a good guide to the immediate future,” he said.

The Bank said spending on leisure and entertainment, which accounts for a fifth of all consumer spending, remained subdued.

Business investment was also weak, which would weigh on the recovery.

Slower recovery

The Bank expects the UK economy to shrink by 9.5% this year.

While this would be the biggest annual decline in 100 years, it is not as steep as its initial estimate of a 14% contraction.

The Bank said the UK still faced its sharpest recession on record, with the outlook for growth now “unusually uncertain”.

Mr Bailey said it was the “largest quantum of uncertainty in a forecast” that policymakers had ever published.

The Bank expects the UK economy to grow by 9% in 2021, and 3.5% in 2022, with the economy forecast to get back to its pre-Covid size at the end of 2021.

This compares with growth estimates of 15% and 3% respectively, in a scenario the Bank set out in May. Read more

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