According to the S&P Global Ratings, the United Kingdom is already experiencing a mild four-quarter depression that began in Q2 2022 due to families’ struggles with inflation. Inflation is already sitting at about 10% (as reported by Invezz on 22nd September) and will likely increase throughout the winter, affecting spending.
UK economy is already in an economic downturn
S&P indicated that the UK is already experiencing a full-year downturn as Europe faces rising credit risk and a rough winter. According to a report released on Tuesday, S&P Global Ratings predicted that in Q4 2022 and Q1 2023, there would be no growth in the eurozone, and for the year, growth would reach 0.3%.
Europe is facing an uncertain geopolitical and challenging economic outlook, with Moscow’s political risk appetite seemingly increasing following territory losses in Ukraine. Also, the high gas prices due to fuel inflation have worsened things. The S&P indicated that the uncertainty had triggered interventions supporting businesses and consumers as central banks recalibrate interest rates quickly.
Chairman of S&P Regional Credit Conditions, Paul Waters, indicated that the UK government’s fiscal measures, especially on household fuel bulls, would protect family budgets from more significant depression.
According to Waters, the fiscal measures alongside labor market resilience will help the UK economy not to perform any worse. The falling British pound will increase the cost of imported products, but Waters pointed out that inflationary forces are not limited to retail fuel prices. Headline inflation, which excludes volatile food, fuel, liquor, and cigarette prices, is above 6%.
Watters: deepening volatility of the pound could worsen the economic environment
S&P anticipates that in response, the Bank of England will increase interest rates to 3.2% by February next year from present levels of 2.25%, significantly slowing the growth and bringing inflation back toward its medium-term benchmark of 2%.
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.
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