The only remit of the Bank of England in terms of economic management is to achieve inflation at or near 2 per cent annually; if this were happening, the central bank may stop buying government bonds, and make it harder for the government to refinance.
Mr Williams says he does not expect central banks to act in this way, as inflation was considerably below target prior to Covid; he anticipates policymakers will tolerate it being above target for an extended period.
Steven Bell, managing director of Global Macro at BMO Asset Management, says that he does not believe inflation will be a problem in the near term, because the unemployment rate may be relatively high for a prolonged period of time.
This is deflationary in an economy as it means individuals have less money to spend.
Bill Dinning, chief investment officer at Waverton, is less sanguine.
He says: “There will have to be a reckoning from all of this borrowing; it may be that inflation is higher and clients have to deal with that, or it may be something else.”
The nature of the recession
While the definition of a recession as two consecutive quarters of negative growth is universal, there are a multitude of different types of recessions.
The downturn caused by Covid-19 is what most economists would call an exogenous shock, that is, prompted by an event outside of the financial system.
Such recessions tend to be very sudden, very deep, and over very quickly. They end relatively quickly because if the shock is from outside the system, as the shock subsides, the system is intact and activity can return to previous levels.
This is the thinking behind those who believe the UK economy will recover in a V shape.
But Fahad Kamal, strategist at Kleinwort Hambros, says this is not a typical exogenous shock-induced recession, because the impact of the pandemic may have changed long-term societal trends.
He says those factors, such as remote working, will lead to "permanent" changes in the structure of the economy.
Exogenous shocks do not typically produce permanent changes, but Mr Kamal says the combination of the Covid crisis and the changes to society are creating “lost growth” which will not be recovered by the economy.
The multiplier effect
The rationale for governments increasing spending in a downturn was first established by the UK economist John Maynard Keynes, who described a “multiplier effect”.
This is the idea that, if the government stimulus is spent properly, it can generate more activity and wealth in the economy than the cost of the original debt.
Some economic activities have a larger, and faster acting, multiplier than others. For example, a pound spent by the government on a construction project tends to move quickly through the economy, as such a project employs many people in different trades and requires the purchase of raw materials.
