Inflation has been stressing US consumers for several months, but there are recent signs that it may be slowing. This is not the case in the UK, where inflation is even higher than in the US, and intersects with other crises.
High prices, combined with political instability resulting from the departure of former Prime Minister Boris Johnson, trade disruptions due to Brexit and COVID, and an unpredictable energy market due to the invasion of the Ukraine by Russia, make Britain’s economy more like that of the developing world rather than the sixth largest on the planet, according to a new research note from Saxo Bank’s head of macro analysis, Christopher Dembik.
The only thing keeping the UK economy from fully resembling an “emerging market economy”, according to Dembik, is a currency crisis.
A currency crisis is a type of financial crisis defined by the fall in value of a national currency. The British pound, however, has remained stable during recent major economic events, including Brexit and COVID.
Over the past week, despite major economic shifts, the pound has fallen 0.7% against the euro and 1.5% against the dollar, signaling the currency’s strength, Dembik wrote.
“Our bet: having weathered Brexit uncertainty, we don’t see what could push the pound into a tailspin,” he added.
The slight fluctuation in the currency’s value last week came as the Bank of England instituted its biggest interest rate hike – 50 basis points – in 27 years, while predicting that the UK GDP will decline significantly over the next yeartriggering a recession.
“The latest gas price hike has caused a further significant deterioration in the outlook for business in the UK and the rest of Europe,” the bank wrote in its economic outlook report. “The UK is now expected to enter recession from the fourth quarter of this year.”
UK inflation is currently at a four-decade high of 9.4%, close to the US four-decade high of 9.1%. The Bank of England’s series of rate hikes attempted to bring it down, with central banks around the world taking similar action.
In his research note, Dembik pinned recession fears to new car registrations, which he says are among the main indicators of the overall state of the UK economy. Enrollment has plummeted over the past year, he wrote. In July 2021, there were 1,835,000 new registrations, but only 1,528,000 a year later, a drop of 14%.
“This is the lowest level since the late 1970s,” Dembik wrote. “The recession will be long and deep. There will be no easy escape.
He also pointed to the Bank of England’s forecast that GDP growth will persist at 1.75% below current levels until 2025. “What Brexit did not do by itself, the Brexit coupled with Covid and high inflation managed to do that,” he wrote. “The British economy is crushed.”
Dembik, however, included a note of optimism in his report. The most recent major interest rate hike by the Bank of England, he said, could be the last if inflation measures start showing signs of falling prices.
“However, it is too early to tell whether the current tightening cycle will be definitively over in September,” he wrote, referring to the date of the bank’s next meeting. scheduled for next month. “Inflation dynamics have been a bit unpredictable in recent months. It is the least we can say. »
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