How businesses can use the Bank of England's illustrative scenario
11 May 2020: Philippa Kelly, ICAEW’s Head of Financial Services, considers how the Bank of England’s illustrative scenario can help chartered accountants in uncertain times.
The Bank of England published its Interim Financial Stability Report and Monetary Policy Report on 7 May. As financial reporting increasingly requires businesses to take a view of the future, these reports will interest finance professionals in that they can help businesses forecast and consider how the assumptions made fit with their business model and sector. They may be helpful when considering impairments, cashflow projections and other forward-looking reporting requirements.
The reports demonstrate the multitude of assumptions that firms will be working with when forecasting, and the scenario can play a helpful role in setting out a base case which is then adapted and built upon.
A selection of the economic variables in the illustrative scenario which may be helpful for accountants are summarised below:
| Economic variable | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|
| UK GDP | 1 | -14 | 15 | 3 |
| Unemployment (%) | 4 | 8 | 7 | 4 |
| CPI inflation | .8 | 0.6 | 0.5 | 2 |
| BoE Base Rate (%) | 0.8 | 0.2 | 0.1 | 0.2 |
| World GDP (PPP-weighted) | 3 | -12 | 15 | 5 |
| World GDP (UK-weighted) | 2 | -13 | 14 | 4 |
| Household consumption | 1 | -14 | 15 | 4 |
| Household savings ratio | 6 | 17 | 10 | 9 |
| Business investment | 1 | -26 | 19 | 12 |
| Hourly labour productivity (GDP per hour worked) |
0 | -1 | 2 | 0 |
| Average weekly earnings (Growth in whole‑economy total pay) |
3 | -2 | 4 | 2 |
Average annual growth rates
While the Bank’s report presents various data points and supporting analysis, a key sensitivity is how people respond to lockdown being lifted and whether there is a rush toward a “new normal” or whether conservatism wins out. Confidence and behaviour will play a key role in recovery and are not easily predictable.
It is these aspects that will also affect supply and demand factors for businesses in different ways. The reports do not consider individual sectors or sub-sectors in detail, but when assessing the turnover shock those who were least affected were supermarkets, utilities, waste and pharmaceuticals. The worst affected are hotels, restaurants, sport, pubs and airlines.
Whilst businesses across all sectors are operating amidst significant uncertainty the illustrative scenario offers a set of plausible assumptions they can work from.