Foreign currency exchange rates are displayed in Fleet Street for the benefit of travelers to the UK, on 27th September 2022, in London, England.
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LONDON — The UK is already in the throes of a full-year recession, according to S&P Global Ratings, while Europe faces a tough winter and rising credit risk.
In a report published Tuesday, the ratings agency projected that euro zone growth will stall in the fourth quarter of 2022 and first quarter of 2023, with growth for the year only reaching 0.3%.
“Europe faces a difficult and uncertain geopolitical and economic outlook as Russia’s political risk appetite appears to increase after losses of territory in Ukraine, and exorbitant energy prices fuel inflation, triggering interventions to support consumers and businesses, with central banks recalibrating interest levels in quick order ,” S&P said.
It also predicted that the UK is already in the midst of a “moderate four-quarter recession that started in the second quarter,” as households face inflation running at 9.9% and expected to rise further over the winter, quashing consumer spending over the coming quarters.
“Fiscal support measures deployed by the government, notably the upper limit set on typical household energy bills (“Energy Price Guarantee”), will significantly protect household budgets from an even greater inflation squeeze over the winter,” S&P Regional Credit Conditions Chair Paul Watters said in the report.
“This, along with ongoing resilience of the labor market, are the main reasons we do not expect the UK economy to perform worse.”
However, Watters noted that inflationary pressures are not confined to retail energy prices, and the plunging pound will further drive up the price of imported goods while domestic price pressures remain elevated, with core inflation — excluding volatile food, energy, alcohol and tobacco prices — still above 6%.
S&P expects the Bank of England to respond by raising interest rates from the current 2.25% to 3.25% by February 2023, sharply cooling the economy in order to return inflation toward its 2% target in the medium term.
“Beyond global and regional risks related to the Russia-Ukraine conflict, lasting or deepening volatility in the pound’s exchange rate and gilt markets could lead to more adverse financing conditions and worsen the broader economic environment beyond what we currently expect in our forecast,” Watters added.
The pound hit an all-time low against the dollar on Monday, while UK gilt yields have surged, as markets recoiled after the new government’s controversial so-called “mini-budget” on Friday.
The suite of policy measures included tax cuts and energy subsidies to households and businesses estimated to cost a minimum 9% of GDP through 2026, and the Bank of England responded by reiterating its commitment to further monetary policy tightening in order to rein in sky-high inflation.
“The concern for the gilts market is that nearly all of that 6% of GDP [the emergency energy support] will be funded via new debt, during a period when the BOE is shrinking its balance sheet, and sterling depreciation is adding to inflationary pressures,” the S&P report added.
Finance Minister Kwasi Kwarteng’s tax cut policies have drawn criticism from US Federal Reserve official Raphael Bostic and former Treasury Secretary Larry Summers, while the International Monetary Fund issued a rare public rebuke late Tuesday.
S&P is forecasting annual UK GDP growth of 3.3% in 2022 before a contraction of 0.4% in 2023.
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George is Digismak’s reported cum editor with 13 years of experience in Journalism