Pensioners protest against rising fuel prices during a demonstration outside Downing Street organized by the National Pensioners Convention and Fuel Poverty Action on February 7, 2022 in London, England.
Guy Smallman | Getty Images
Political instability, trade disruptions, the energy crisis and soaring inflation are making the UK an “emerging country”, according to Saxo Bank.
The Bank of England warned last week that the UK economy would enter its longest recession since the Great Financial Crisis in the fourth quarter, causing GDP to fall by 2.1%. Meanwhile, inflation is expected to peak above 13% in October.
Importantly, the central bank does not anticipate a strong rebound from recession and sees GDP remaining 1.75% below current levels in mid-2025.
In a research note on Monday, Saxo Bank’s head of macro analysis, Christopher Dembik, said the UK was “looking more and more like an emerging country”.
A new Prime Minister will be announced on September 5 after the resignation of Boris Johnson, with Tory candidates Liz Truss and Rishi Sunak vying for the keys to 10 Downing Street as the country faces a historic cost of living crisis and the largest drop in living standards on registration.
The UK energy price cap is set to rise another 70% in October, pushing energy bills above £3,400 ($4,118) a year and pushing millions of households into poverty , with a further increase in the cap expected early next year.
The country has also been grappling with trade disruptions due to Brexit and Covid-related bottlenecks.
The only factor missing from characterization as an emerging market, Dembik said, is a currency crisis, with the pound firm despite a litany of macroeconomic headwinds.
“It’s only down 0.70% against the euro and 1.50% against the US dollar over the past week. Our bet: After surviving Brexit uncertainty, we don’t see which could push the pound into a tailspin.”
However, he suggested that all leading indicators point to more difficulties for the UK economy. For example, new car registrations – often seen as a leading indicator of the health of the UK economy – fell from 1.835 million in July 2021 to 1.528 million last month, a fall of 14%.
“This is the lowest level since the late 1970s. The recession will be long and deep. There will be no easy way out. This is very worrying, in our view. The Bank of England believes that the recession will last with GDP still 1.75% below today’s levels by mid-2025,” Dembik said.
“What Brexit failed to do on its own, Brexit coupled with Covid and high inflation managed to do. The UK economy is crushed.”
The only consolation, according to the Danish investment bank, is that the interest rate hike planned by the Bank of England in September – which would be its seventh in a row – could be the last.
“Outside of the labor markets, there are signs that some of the main drivers of inflation may start to subside,” Dembik said.
“Furthermore, the prospect of a long recession (five quarters of negative GDP from Q4 2022 through Q4 2023) will certainly push the Bank of England into a wait-and-see stance.”
The “social contract is broken”
However, the bank suggested that the current crisis had longer-term implications.
“Imagine the graduate entering the job market in 2009/10, who will have been told it was a once-in-a-lifetime accident. They are now in their early thirties and experiencing yet another economic crisis unique in their lifetime,” Dembik said.
“They faced an economy of suppressed wages, no prospect of housing, two years of socialization lost due to confinement, obscene energy and rent bills and now a long recession. This will lead to more of poverty and despair.”
The Bank of England has projected real household after-tax disposable income to fall by 3.7% in 2022 and 2023, with low-income households hardest hit, and Dembik pointed to recent IMF findings that The UK’s poorest households are among the hardest hit in Europe. by the soaring cost of living.