Bank of England recession warning is too ‘optimistic’, economists warn

Britons face an even bigger blow to living standards and a longer recession than the Bank of England predicts as Russia further threatens gas supplies to Europe, economists have warned.

Experts said even the Bank’s most pessimistic scenario failed to take into account the likelihood that gas prices, which have doubled in three months, will rise further.

That calculation now looks “increasingly optimistic,” investment bank UBS said, while analysts at Capital Economics warned it was now a “clear possibility” that Vladimir Putin would stop gas flows from Russia to Europe altogether.

Despite a number of increasingly stern warnings about the risk of a gas shortage in Europe, the Bank of England said it did not need to consider the potential impact of that scenario.

A source at the Bank said the aim of her report was not “to build a worst case by plugging in more and more inflationary potential pathways for energy”.

It came after the Bank released one of its most bleak economic forecasts ever on Thursday, as interest rates hiked and pressures on household budgets worsened.

The Bank predicts that a deep recession will hit before Christmas and will continue throughout the year, with incomes falling at a record low, inflation peaking at 13.3% and almost no economic growth until the end of 2025.

But none of the bank’s models accounted for rising gas prices, a scenario that analysts say is now a one in five possibility. Oxford Economics said it is difficult to put an upper limit on how high gas prices can go if supplies start to run out.

A further price hike is now more likely than a decline, said Paul Dale, UK chief economist at Capital Economics. “You could see a further rise in gas prices, which then stay higher for longer. We do not expect gas prices to fall any time soon.”

“The Bank is essentially predicting stagflation and suggesting that the drug is raising interest rates. It’s really remarkable.

While the Bank has not modeled the effect of higher prices, its published figures show that any 25 percent increase in gas prices would increase inflation by 1 percentage point and reduce economic output by 0.6 percentage points.

If gas prices doubled again this winter, inflation would climb to 17.3 percent and the economy would collapse by 4.6 percent if the drop in one year is greater than during the global financial crisis in 2009.

Edward Gardner, a commodities specialist at Capital Economics, said gas prices will remain “very high” in the near term.

“There is clearly an upside risk to prices as Europe is still dependent on gas from Russia. If Russia cut off supplies completely and we had a cold winter, that would be a perfect storm scenario.”

Wholesale prices are ten times higher than a little over a year ago. The latest surge reached an unprecedented €200 per megawatt-hour after Russian state oil giant Gazprom further cut power to Europe last month.

Capital Economics estimates that prices would reach €250 (£211) if Russia cut supply further. However, Mr Gardner said prices could be much higher.

“If you’re short on goods that people need for basic necessities, it’s a matter of who has the biggest pockets?”

“Unfortunately, many people will not be able to afford those prices.”

He added: “Russia has been one step ahead of Europe’s desire to reduce its dependence on Russian gas. Europe aims to cut its dependence on Russia by two-thirds by the end of this year. Russia has already done that for us. There is clearly a risk that it will force Europe to reduce its dependence even further.

Andrew Goodwin, the UK’s chief economist at Oxford Economics, said a further significant increase in gas supplies was likely. “It’s definitely an opportunity and something our customers are preparing for.

“It would be hugely damaging. We think this would mean UK GDP will fall by 2.5 percent next year.”

Felix Huefner, senior economist at UBS, said economic data from across Europe, “everything points to things getting weaker.

“Our base case assumes there is no gas rationing or supplies to Europe continue to decline, which is now looking increasingly optimistic.

“The likelihood of downside risks is greatly increased, especially that we have higher energy prices and rationing.”

Governments across Europe are taking the prospect of major gas supply problems seriously. Germany started rationing hot water last month, dimming street lights and closing swimming pools, and EU member states recently agreed on a proposal to ration gas supplies.

Meanwhile, the International Monetary Fund (IMF) released models suggesting that several European countries would plunge into deep recessions if they lost access to Russian gas, with Hungary, Slovakia and the Czech Republic seeing their economies shrink by up to 6 percent. Germany and Italy would also be hit hard, the IMF said.

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