Britain has endured a lack of leadership for months, but the country has slipped toward a recession and a humanitarian crisis caused by soaring energy prices.
Growth prospects have weakened since Boris Johnson announced he was stepping down in July. Annual inflation is over 10% for him amid soaring food and fuel prices. Hundreds of thousands of workers in ports, trains and mailrooms are going on strike because they are frustrated by the rising cost of living. The British pound hit its worst month since the aftermath of the 2016 Brexit referendum, hitting its lowest level against the US dollar in more than two years.
“You just get hit after hit,” said Martin McTag, who heads the British Small Business Federation. “I’m afraid I won’t find any good news.”
Before things get better, they can get worse. The Bank of England expects inflation to jump to 13% as the energy crisis intensifies. Citigroup estimates that UK inflation could peak at 18% in early 2023, while Goldman Sachs expects 22% if natural gas prices “continue to rise at current levels”. It warns that it may reach %.
Johnson’s potential successors, current Foreign Secretary Liz Truss and former Finance Minister Rishi Sunak, are called upon to announce dramatic intervention as soon as possible. of which He is the fourth Conservative Party leader in ten years.
The most pressing issue is dealing with skyrocketing energy costs. This could lead to a wave of business closures, forcing millions of people to choose between putting food on the table or heating their homes this winter. Experts warn that without urgent action, people will fall into poverty and deaths in cold climates will rise.
Jonathan Neame, who runs Shepherd Neame, Britain’s oldest beer company, said: “Everybody is assuming there will be a quick and decisive announcement that will solve the problem, or at least put people at ease. “Otherwise, the person would be under a lot of pressure.”
Energy ‘catastrophe’
Household energy bills will rise by 80% from October to average £3,549 ($4,106) per year.According to analysts, the household price cap is It climbed to over £5,000 ($5,785) in January and over £6,000 ($6,942) in April.
The post-coronavirus lockdown consumption boom is rapidly cooling down as people are forced to reassess their budgets. The Bank of England has warned that the UK economy could slip into recession in the coming months.
“The main challenge posed by skyrocketing energy prices is that large energy households, especially poor households, will have a really hard time making ends meet,” said Ben Zaranko, senior research economist at the Institute for Public Finance Research. said Mr. “That would mean significant cuts in other areas of spending.”
Mr Neame, whose portfolio includes about 300 pubs in the south of England, said business owners were panicking. If you can find a supplier, your annual utility bill will be ridiculously high. Greene King pubs head of his chain, Nick Mackenzie, said energy costs had jumped by £33,000 ($38,167) a year at one of his locations the company works with, he said.
“It’s really difficult for many businesses, especially those that have experienced Covid in a weakened state,” McTague said. “They are now struggling to cope with the catastrophe of a lifetime. .”
A collapsing British pound will exacerbate the problem, raising the cost of importing energy and other commodities, which could push inflation even higher.
overlapping crises
That’s not the only reason business owners and investors are getting worried. Job openings fell from May to July, but he is 60% above pre-pandemic levels. Finding workers for vacant roles has been a particular challenge for the UK since the referendum decided to leave the European Union. According to the Office for National Statistics, in 2021 she will have around 317,000 fewer EU citizens living in the UK than he did in 2019.
Brexit has also disrupted trade, especially with the UK’s largest trading partner, the EU. In the long term, the Office of Budget Responsibility predicts that imports and exports will be about 15% lower than if the UK remained in her EU.
UBS UK economist Dean Turner said it was up to the new prime minister to try to make the most of the country’s status without further turmoil. But hardline British lawmakers are still pressuring Mr Johnson to abandon key parts of the Brexit deal he signed with the European Union.
“Brexit happened. That’s the reality. We all have our own opinions about it,” Turner said. “But we have to work on it to get better. I’m struggling to see if we have the momentum to do that.”
there is no easy solution
Truss, who is expected to take over the reins from Johnson after a series of scandals toppled the government earlier this summer, has vowed to revive the economy through tax cuts. He fears the approach will fuel inflation, hurt fragile finances, and keep money from putting money in the pockets of those who need it most.
“Benefits of cutting [taxes] “It’s going to go to those who pay more taxes—those who generally have more money,” said Jonathan Marshall, senior economist at the Resolution Foundation.
There’s no way the state can avoid paying huge sums to deal with this winter’s energy situation, but targeted measures will be needed to avoid waste. Freezing gas and electricity prices over the next two winters could cost the government more than £100 billion ($116 billion) in losses, according to researchers at the Government Institute.
“Energy is expensive, gas is expensive,” said Marshall. “It needs to be paid for so people don’t freeze at home, but the country doesn’t have to pay for it for those who can afford it.”
There are also questions about how the next administration will carry out large-scale economic interventions. Especially when reducing taxes and thus reducing government revenues is a priority.
The UK government has borrowed heavily to provide support during the coronavirus lockdown. The country’s debt is now almost 100% of gross domestic product. When interest rates were rock bottom and access to cash was cheap, this wasn’t a big deal.
But that is no longer the case. The Bank of England is aggressively raising interest rates to curb inflation. This makes it more and more expensive for the government to service the debt. The UK has also issued a number of inflation-protected bonds, adding to its vulnerability.
IFS’ Zaranko said, “This is a near-perfect patchwork of challenges in a way that finances face risks like never before.”
