Pensioners protest rising fuel prices at a rally outside Downing Street called by the National Pensioners Convention and Fuel Poverty Action on February 7, 2022 in London, England.
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Political instability, business disruptions, an energy crisis and soaring inflation are turning the UK into an “emerging market country”, according to Saxo Bank.
the Bank of England warned last week that the The UK economy will enter its longest recession since the Great Financial Crisis in the fourth quarter, leading GDP 2.1% lower. In the meantime, Inflation is forecast to peak at 13% in October.
Importantly, the central bank does not anticipate a sharp rebound from the recession and expects GDP to remain 1.75% below current levels in mid-2025.
In a research note on Monday, Saxo Bank’s head of macro research Christopher Dembik said the UK “is looking more and more like an emerging market country”.
A new prime minister will be announced on September 5 after the resignation of Boris Johnson, with Conservative candidates Liz Truss and Rishi Sunak vying for the keys to 10 Downing Street as the country grapples with a historic cost of living crisis and the steepest drop in living standards on record.
The UK’s energy price cap will rise a further 70% in October, pushing energy bills above £3,400 ($4,118) a year and pushing millions of households into poverty, with a further cap increase expected early next year.
The country has also been struggling with business disruptions due to Brexit and Covid-related bottlenecks.
The only missing factor in a characterization as an emerging market country, Dembik said, is a currency crisis, with the british pound holding firm despite a litany of macroeconomic headwinds.
“It only fell 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 what could push the pound lower free”.
However, he suggested that all leading indicators point to further pain ahead for the British economy. For example, new car registrations, often perceived as a leading indicator of the health of the British 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 the most worrying thing, in our opinion. The Bank of England assesses that the fall will last with GDP still 1.75% below current levels in mid-2025,” Dembik said.
“What Brexit has not done on its own, Brexit together with Covid and high inflation have done. The UK economy is crushed.”
The only consolation, according to the Danish investment bank, is that the Bank of England’s expected rate hike in September, which would be the seventh in a row, could be the last.
“Outside of labor markets, there are signs that some of the key drivers of inflation may be starting to ease,” Dembik said.
“Also, the prospect of a long recession (five negative quarters of GDP from Q4 2022 to Q4 2023) will certainly push the Bank of England into a hold position.”
The ‘social contract is broken’
However, the bank suggested that the current crisis has longer-term implications.
“Imagine the graduate entering the workforce in 2009/10, who will have been told this was a once-in-a-lifetime accident. They are now in their early 30s and having another once-in-a-lifetime economic crisis,” Dembik said.
“They faced an economy of repressed wages, no housing prospects, two years of socialization lost to lockdown, obscene rent and energy bills and now a prolonged recession. This will lead to more poverty and despair.”
The Bank of England projected that households’ real after-tax disposable income will fall by 3.7% between 2022 and 2023, with low-income households hardest hit, and Dembik highlighted recent IMF findings that higher-income households The UK’s poor are among the worst affected in Europe. due to the increased cost of living.