Ukraine war could cause a ‘renewed downturn’ in UK, warn economists

Rising commodity prices following Russia’s invasion of Ukraine will exacerbate pressure on UK living costs and reduce growth, economists have warned, as the Bank of England prepares its latest assessment of the economy.

Oil, gas and wheat prices have risen sharply since the end of February, raising consumer prices in the UK and pointing to a higher peak in inflation this coming spring followed by a period of sustained high price increases.

When forecasting groups, such as Goldman Sachs, now expect inflation to peak above 9 percent, even higher prices will exacerbate the greatest expectation Reduce household disposable income For 30 years, it may slow economic growth to a crawl.

Thomas Poe, an economist at RSM UK Financial Services, said: “Once we take into account the impact of higher gas prices, tighter financial conditions and lower business and consumer confidence, we think UK GDP growth [this year] “It could be between 0.75 and 1 percentage point lower than it could have been otherwise.”

While Andrew Goodwin, the UK’s chief economist at Oxford Economics, cut his forecast for UK GDP growth by 0.1 percentage points to 2022, he shaved more than his forecast for 2023 to reflect the further rise in gas and electricity prices this autumn.

But due to the uncertainty around The conflict in Ukraine, Few economists are confident in their forecasts, and most of them are constantly correcting their forecast. “The longer the war goes on, and the greater the sanctions on Russia, the greater the damage to British activity,” warned Sandra Horsfield, an economist at Investec.

The major corrections in forecasts come despite the fact that the UK has little direct economic ties with the Russian economy. Less than 4% of Britain’s gas supply is from Russia, a lower rate than other EU countries. Russia is responsible for only 1.3% of UK trade in goods and 0.7% of its foreign investment.

Only $ 3 billion, or 0.1 per cent, of the UK banking system’s foreign claims are related to Russian banks, limiting any reasonable financial fall if Russian banks fail in the coming weeks.

However, the UK buys energy and goods in international markets, where prices are soaring. “The main impact on the UK economy of Russia’s invasion of Ukraine is expected to be that energy prices remain high over time,” Goodwin said.

Line chart of annual percentage change in the CPI showing that economists improve their inflation forecasts in the UK

Yael Salpin, chief economist at the UK at KPMG, noted that it is not just energy prices that are rising because of the conflict. “Food prices are also likely to be affected,” she said, adding that the higher price of wheat alone could add 0.7 percentage points to inflation based on current levels. The increase in the cost of fertilizers also raises food prices.

Before the start of the war in Ukraine, the Bank of England predicted that inflation would peak at 7% in April, but since last week most economists have changed their forecasts upwards.

Financial markets now expect RPI inflation – which is about 1 percentage point higher than the consumer price index inflation – to average more than 5% over the next five years.

Line chart of average inflation expectations at %% the next five years shows that markets are pricing higher inflation in the UK

Stephen Bull, an economist at Goldman Sachs, predicts that headline inflation will move from April to October, when he expects it to rise to 9.5%, and remain above 7% until next spring.

Hesitantly predicting a further 55 percent rise in energy bills this fall, Bull said “headline inflation peaks from April to October.”

This rise “will exacerbate the cost of living crisis by reducing real household income,” warned Paul Dales, the UK’s chief economist at Capital Economics. Even before the war, the Bank of England predicted the largest decline in living standards in three decades in 2022.

Although households have much stronger funds on average than after the financial crisis because they could not spend as much as usual during the epidemic, Anna Boata, an economist at Allianz Research, said it would not protect the wider economy from a sharp slowdown.

Column chart of income from work after tax in real terms, percentage of annual change shows that real income is expected to fall even before the war in Ukraine

She noted that the excess savings accumulated through the epidemic “will not be enough to absorb the income distress from higher energy bills.”

Economists had expected consumer spending to be the main driver of growth this year as the UK recovered from the plague, but hopes for rapid growth in exceptional consumption are falling. The British Chambers of Commerce, a business organization, revised the growth forecast of consumer spending to 4.4% in 2022, down from the previous December forecast of 6.9%.

It also sharply reduced business investment growth to 3.5% this year and warned that the risks of recession are now rising.

“Russia’s invasion of Ukraine could lead to a renewed economic downturn if it halted activity by triggering a continuing disruption of supply chains or a more significant inflationary rise,” warned Soren Thiro, head of the UK Chamber of Commerce’s Economics Division.

The deterioration in the forecast may also mean that “instead of tightening the labor market as is currently happening, the UK could experience job losses,” Horsefield said.

Ukraine war could cause a ‘renewed downturn’ in UK, warn economists Source link Ukraine war could cause a ‘renewed downturn’ in UK, warn economists

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