Pensioners protest against rising fuel prices at a demonstration outside Downing Street convened by the National Pensioners Convention and Fuel Poverty Action on February 7, 2022 in London, England.
Guy Kleinman | Getty Images
Political instability, disrupted trade, an energy crisis and skyrocketing inflation make the UK an “emerging market” according to Saxo Bank.
The Bank of England warned last week that the UK economy will enter its longest recession since the Great Financial Crisis in the fourth quarter, resulting in a 2.1% contraction in GDP. Meanwhile, inflation is forecast to peak at over 13% in October.
Importantly, the central bank does not expect a significant recovery from the recession and expects GDP to remain 1.75% below today’s level 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 market”.
A new Prime Minister will be announced on September 5 following 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 sharpest fall in living standards faced is recording.
The UK’s energy price cap is set to rise by a further 70% in October, taking energy bills to over £3,400 ($4,118) a year and pushing millions of households into poverty, with another cap expected early next year.
The country is also grappling with trade disruptions due to Brexit-related and Covid-related shortages.
The one factor missing from an emerging market country characterization, Dembik said, is a currency crisis, with sterling holding up despite the litany of macro headwinds.
“It’s down just 0.70% against the euro and 1.50% against the US dollar over the past week. Our bet, having weathered the Brexit uncertainty, we don’t see what could send sterling into a free fall.”
However, he suggested that all leading indicators are pointing to further pain 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 14% drop.
“This is the lowest level since the late 1970s. The recession will be long and deep. There will be no easy escape. In our view, this is extremely worrying. The Bank of England estimates the slump in GDP will continue into mid-2025, still 1.75% below today’s levels,” Dembik said.
“What Brexit alone failed to do, Brexit did in conjunction with Covid and high inflation. The UK economy is devastated.”
The only consolation, according to the Danish investment bank, is that the Bank of England’s expected rate hike in September – which would be its seventh straight – could be its last.
“Outside of labor markets, there are signs that some of the key drivers of inflation are starting to fade,” Dembik said.
“Additionally, the prospect of a prolonged recession (five negative quarters of GDP from Q4 2022 to Q4 2023) will certainly put the Bank of England in a wait and see position.”
The “social contract is broken”
However, the bank hinted that the current crisis is having longer term implications.
“Imagine the graduate entering the workforce in 2009/10 who was told this was a one-off crash. They’re in their early 30s now and they’re in the midst of another one-off economic crisis,” Dembik said.
“They faced an economy with depressed wages, no housing prospects, two years of socialization lost to lockdown, obscene utility bills and rents and now a protracted recession. This will lead to more poverty and despair.”
The Bank of England has forecast households’ real after-tax disposable income to fall by 3.7% in 2022 and 2023, with low-income households hit hardest, and Dembik highlighted the latest findings from the IMF that Britain’s poorest households are among the hardest hit in Europe by the cost of living spike.