The United Kingdom is now classified as a “emerging market country” by Saxo Bank due to political unpredictability, trade disruptions, an energy crisis, and soaring inflation.
The U.K. economy will experience its longest recession since the Great Financial Crisis in the fourth quarter, according to a warning issued by the Bank of England last week. This will cause GDP to decline by 2.1 percent. In the meanwhile, a high in inflation above 13% is anticipated for October.
It’s important to note that the central bank does not forecast a quick recovery from the crisis and projects that GDP will stay 1.75 percent below current levels by mid-2025.
Christopher Dembik, Head of Macro Analysis at Saxo Bank, stated in a research note on Monday that the U.K. is “more and more looking like an emerging market country.”
After Boris Johnson’s departure, a new prime minister will be named on September 5. As the nation deals with a historic cost of living crisis and the biggest drop in living standards on record, Conservative candidates Liz Truss and Rishi Sunak are fighting for the keys to 10 Downing Street.
With a further increase to the ceiling anticipated early next year, the U.K.’s energy price cap is scheduled to increase by another 70% in October, bringing annual energy costs above £3,400 ($4,118) and pushing millions of homes into poverty.
Due to Brexit and Covid-related constraints, the nation has also been dealing with trade difficulties.
According to Dembik, the British pound has held steady despite the multitude of macroeconomic challenges, leaving a currency crisis as the lone element missing from the definition of an emerging market nation.
“It only dropped 0.70% against the euro and 1.50% against the U.S. dollar over the past week. Our bet: after surviving Brexit uncertainty, we don’t see what could push the sterling pound into a free fall.”
But he asserted that all leading indicators indicate that the British economy will endure further hardship. For instance, new car registrations, which are sometimes regarded as a leading sign of the health of the British economy, decreased by 14% from 1.835 million in July 2021 to 1.528 million last month.
“This is the lowest level since the end of the 1970s. The recession will be long and deep. There won’t be an easy escape. This is most worrying, in our view. The Bank of England assesses the slump will last with GDP still 1.75% below today’s levels in mid-2025,” Dembik said.
“What Brexit has not done by itself, Brexit coupled with Covid and high inflation have succeeded in doing. The U.K. economy is crushed.”
The only consolation, in the opinion of the Danish investment bank, is that the Bank of England’s anticipated interest rate increase in September, which would be its seventh consecutive increase, may be the final one.
“Outside of the jobs markets, there are signs that some of the key inflation drivers may be starting to ease,” Dembik said.
“In addition, the prospect of a long recession (five negative quarters of GDP starting in Q4 2022 all the way through to Q4 2023) will certainly push the Bank of England into a wait-and-see position.”
Nevertheless, the bank asserted that the current crisis has longer-term implications.
“Imagine the graduate entering the workforce in 2009/10, who will have been told this was a once-in-a-lifetime crash. They are now in their early 30s and having yet another once-in-a-lifetime economic crisis,” Dembik said.
“They faced an economy of suppressed wages, no housing prospects, two years of socializing lost to lockdown, obscene energy bills and rent and now a lengthy recession. This will lead to more poverty and despair.”
Low-income households will be hardest hit by the projected decline in real household post-tax disposable income of 3.7% between 2022 and 2023, according to the Bank of England. Dembik also referred to recent IMF findings that the UK’s poorest households are among those in Europe that have been hit hardest by the cost of living spike.