UK plunges into full-year recession as Europe faces tough winter, says S&P

Foreign currency exchange rates are displayed on Fleet Street for the benefit of travelers to the United Kingdom, on September 27, 2022, in London, England.

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LONDON – The UK is facing a year-long recession, according to S&P Global Ratings, while Europe faces a tough winter and rising credit risks.

In a report published on Tuesday, the ratings agency predicted that eurozone growth would stall in the fourth quarter of 2022 and the first quarter of 2023, with growth for the year coming in at just zero. 3%.

“Europe faces a difficult and uncertain geopolitical and economic outlook as Russia’s political risk appetite appears to increase following the loss of territory in Ukraine, and exorbitant energy prices fuel inflation.” inflation, triggering interventions to support consumers and businesses, with central banks re-adjusting interest rates in rapid order,” S&P said.

It also predicts that the UK is already in the midst of a “moderate four-quarter recession starting in the second quarter,” as households face. inflation at 9.9% and is expected to increase further in the winter, dampening consumer spending in the coming quarters.

“Fiscal support measures implemented by the government, in particular the upper limit imposed on a typical household energy bill (“Energy Price Guarantee”), would provide substantial protection Household budgets are spared even greater inflation over the winter,” S&P Regional Credit Conditions President Paul Watters said in the report.

“This, coupled with the continued resilience of the labor market, are the main reasons we don’t think the UK economy will perform any worse.”

Professor KCL says sterling could fall further without aggressive BOE monetary policy

However, Watters noted that inflationary pressures are not limited to retail energy prices, and the drop in sterling will continue to push up import commodity prices while domestic price pressures remain elevated, with inflation rising Core growth – which excludes volatile food, energy, alcohol and tobacco prices – remains above 6%.

S&P Expectations Bank of England reacted by raising interest rates from the current 2.25% to 3.25% in February 2023, drastically cooling the economy to bring inflation back to the 2% target in the medium term.

“In addition to the global and regional risks associated with the Russia-Ukraine conflict, prolonged or deepening volatility in the pound sterling and gold-plated exchange rates could lead to poorer financial conditions. more adverse and worsening of the broader economic environment than we currently expect in our forecasts,” Watters added.

The pound hit an all-time low compared to dollars on Monday, while the UK’s gilt production rose, as the market took a downturn after the so-called controversial “small budget” of the new government on Friday.

The strategist said the UK government has made the position of the Bank of England almost impossible.

The set of policy measures including tax cuts and energy subsidies for households and businesses is estimated to account for at least 9% of GDP by 2026, and the Bank of England responded by reiterating committed to tightening monetary policy further to contain the sky-high levels. inflationary.

“The concern for the gilt market is almost all of that 6% of GDP [the emergency energy support] will be financed through new debt, as the BOE shrinks its balance sheet and the pound weakens further increasing inflationary pressures,” the S&P report added.

Finance Minister Kwasi Kwarteng’s tax cuts have drawn criticism from US Federal Reserve Official Raphael Bostic and Former Treasury Secretary Larry Summerswhile The International Monetary Fund has issued a rare public rebuke third end.

S&P forecasts annual UK GDP growth of 3.3% in 2022 before falling 0.4% in 2023.

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