The fall in UK GDP during the second quarter was largely down to noise. But the risk of recession is rising quickly, with gas futures hitting new highs for next winter and our latest estimates suggesting the household energy price cap could come close to £5,000 in the second quarter of next year. Much now depends on fiscal policy announcements in the autumn.

UK GDP falls in the second quarter

It goes without saying that the latest UK GDP figures are very hard to read. Quarterly output fell by 0.1%, which is almost entirely down to the addition of an extra bank holiday for the Queen’s Jubilee in June, as well as the winding-down of Covid-19 testing/vaccine rollouts through the quarter. Admittedly the impact of the bank holiday was noticeably less than in previous years. The hit to manufacturing, wholesale/retail, transport and construction was generally more muted than during the 2002/2012 jubilee events, which probably reflects changes in the way the economy operates – not least the advent of online shopping.

Either way, an artificial rebound in July should see monthly GDP rise by roughly 0.7%, and overall third-quarter GDP by around half a percent. That means discerning the impact of the cost of living squeeze is going to be tricky for the next few months, at least in terms of the GDP figures. But by the fourth quarter, the signs of recession are likely to be more apparent.

Bank of England is forecasting a 2% hit to GDP, though this assumes no further government support

Chart

Macrobond, Bank of England, ING

Household energy costs could hit £5,000 next year

At its latest meeting, the Bank of England forecasted approximately a 2% fall in GDP over the next couple of years, spread over five quarters of negative growth. Crucially though this prediction relies on a) an assumption that the Bank rate will need to go as far as 3% (which isn't our base case) and b) that fiscal policy will not respond. There’s little doubt now that the fiscal response of the new prime minister in September will be key to whether the Bank of England’s forecasts come to fruition.

Back in June, then-Chancellor Rishi Sunak announced just over £1,000 per household on means-tested benefits. At the time, we estimate that the household energy cap would have risen from roughly £2,000 to just over £3,000 by early 2023, based on futures prices back then and the new Ofgem formula. In other words, the support on offer would have roughly neutralised this increase for those in the lowest income deciles.  

However, if we plug in the latest wholesale gas and electricity prices into the Ofgem spreadsheet, the cap is now likely to hit around £3,500 in October and could potentially get close to £5,000 by the second quarter of next year (though should fall back more noticeably later in the year). While such estimates are very volatile, it does mean that whichever candidate wins the leadership contest will be under huge pressure to significantly ramp up the size of those support payments.

We'll have to wait and see what the new prime minister offers in terms of support, but at the very least a fall in fourth-quarter GDP now looks highly likely.

Gas prices are hitting fresh highs ahead of this winter

Chart

Source: Macrobond, ING

Read the original analysis: UK economy contracts as winter recession risks grow 

Content disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more here: https://think.ing.com/content-disclaimer/

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD recovers above 0.9560 from multi-decade highs

EUR/USD recovers above 0.9560 from multi-decade highs

EUR/USD has managed to erase a portion of its daily losses after having dropped to its weakest level in over two decades at 0.9538 earlier in the day. ECB President Lagarde reiterated that they will continue to raise rates, helping the euro find some demand.

EUR/USD News

GBP/USD stays in red near 1.0700 amid risk aversion

GBP/USD stays in red near 1.0700 amid risk aversion

GBP/USD failed to build on Tuesday's modest recovery gains and dropped below 1.0650 on Wednesday. Although the pair recovered to the 1.0700 area, it is having a difficult time gathering momentum amid the risk-averse market atmosphere.

GBP/USD News

Gold remains vulnerable amid surging bond yields, USD

Gold remains vulnerable amid surging bond yields, USD

Gold staged a modest recovery from its lowest level since April 2020 touched on Tuesday, though lacked any follow-through buying. An intraday US dollar downtick was seen as a key factor that offered some support to the dollar-denominated commodity. 

Gold News

Dogecoin price provides sidelined buyers another opportunity before a 50% rally

Dogecoin price provides sidelined buyers another opportunity before a 50% rally

Dogecoin price undid its gains seen between September 21 and 24 as it came tumbling down, following the footsteps of Bitcoin price. 

Read more

TSLA jumps on delivery email

TSLA jumps on delivery email

Tesla (TSLA) stock outperformed on Tuesday as it closed at $282.94 for a gain of just over 2.5%. That marked a noted outperformance versus the main indices as the S&P 500 and Nasdaq closed either side of flat.

Read more

Majors

Cryptocurrencies

Signatures