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The United Kingdom is now classified as an ‘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 deepest recession since the global financial crisis in the fourth quarter, the Bank of England warned last week, causing GDP to decline by 2.1%. In the meanwhile, a high in inflation above 13% is anticipated for October.
Notably, the central bank projects that GDP will stay 1.75% below current levels in mid-2025 and does not foresee a fast recovery from the recession.
The U.K. is ‘more and more looking like an emerging market country,’ according to Christopher Dembik, head of macro analysis at Saxo Bank, in a research note published on Monday.
A new prime minister will be named after Boris Johnson’s departure on 5 September. Amid the nation’s historic cost-of-living crisis and the sharpest drop in living standards in history, Conservative candidates Liz Truss and Rishi Sunak are battling for the keys to 10 Downing Street.
With another hike in the cap 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.
‘Over the past week, it barely decreased by 0.70% and 1.50%, respectively, against the euro and the dollar. Our prediction is that the sterling pound won’t plunge further after surviving the Brexit uncertainty.’
But he asserted that all leading indicators indicate that the British economy will endure further hardship. As an illustration, the number of new automobile registrations, which are sometimes seen as a top sign of the health of the British economy, decreased from 1.835 million in July 2021 to 1.528 million last month.
Dembik said, ‘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.’
‘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 Bank of England is set to raise interest rates in September, marking its seventh consecutive increase. However, the Danish investment bank believes this could be the final one.
Dembik added, ‘Outside of the jobs markets, there are signs that some of the key inflation drivers may be starting to ease.’
‘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.’
The ‘social contract is broken’
The bank did assert that the current crisis has longer-term ramifications.
Dembik said, ‘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.’
‘They faced an economy of suppressed wages, no housing prospects, two years of socialising lost to lockdown, obscene energy bills and rent and now a lengthy recession. This will lead to more poverty and despair.’
According to the Bank of England, low-income households will be the hardest hit by the projected 3.7% decline in real household post-tax disposable income from 2022 to 2023. Dembik also referred to recent IMF findings that the UK’s poorest households are among those in Europe that the cost-of-living spike has hit the hardest.