Britons face an even bigger hit to living standards and a longer recession than the Bank of England is predicting as Russia continues to threaten gas supplies to Europe, economists have warned.
Experts say that even the Bank’s most pessimistic scenario does not take into account the possibility that gas prices, which have doubled in three months, will continue to rise.
That calculation now looks “increasingly optimistic”, investment bank UBS said, while analysts at Capital Economics warned there was now a “distinct possibility” that Vladimir Putin would completely cut off Russian gas supplies to Europe.
Despite a series of increasingly serious warnings about the risk of gas shortages in Europe, the Bank of England said that there is no need to consider the potential consequences of this scenario.
A source at the Bank said the aim of its report was not to “construct a worst-case scenario by plugging in increasingly inflationary potential paths for energy”.
It comes after the Bank published one of its bleakest economic forecasts on Thursday, simultaneously raising interest rates and increasing pressure on household budgets.
The bank predicts a deep recession will hit before Christmas and last through next year, with incomes falling by a record amount, inflation peaking at 13.3 percent and almost no economic growth until the end of 2025.
But none of the Bank’s simulations took into account the rise in gas prices, analysts believe that this scenario is now one in five. Oxford Economics said it was difficult to put an upper limit on how high gas prices could rise if supplies began to dwindle.
A further rise in prices is now more likely than a fall, according to Paul Dale, chief UK economist at Capital Economics. “You could see gas prices continue to rise, and then stay higher for longer. We do not expect a quick decrease in gas prices.”
“The bank is essentially predicting stagflation and assuming that medicine raises interest rates. It’s really great.
Although the Bank has not modeled the impact of the price increase, the figures it has released show that it estimates that every 25 percent increase in gas prices will increase inflation by 1 percentage point and reduce economic output by 0. 6 percent.
If gas prices were to double this winter, inflation would hit 17.3 percent and the economy would collapse by 4.6 percent, a bigger drop in one year than during the 2009 global financial crisis.
Edward Gardner, commodities specialist at Capital Economics, said gas prices would remain “very high” in the short term.
“There is a clear risk of price increases because Europe is still dependent on gas from Russia. If Russia cut off supplies completely and we had a cold winter, it would be a perfect storm scenario.”
Wholesale prices are ten times higher than they were just over a year ago, with the latest surge reaching an unprecedented €200 per megawatt hour after Russian state oil giant Gazprom further cut flows to Europe last month.
Capital Economics predicts prices will reach €250 (£211) if Russia cuts supplies further. However, Mr Gardner said prices could rise much higher.
“When you have a shortage of goods that people need to meet their basic needs, the question becomes, who has the bigger pockets?”
“Unfortunately, many people will not be able to pay these costs.”
He added: “Russia was one step ahead of Europe’s desire to gradually reduce its dependence on Russian gas. Europe wants to reduce its dependence on Russia by two-thirds by the end of this year. Russia has already done it for us. Obviously, there is a risk that this will force Europe to reduce its dependence even further.
Andrew Goodwin, chief British economist at Oxford Economics, believes further significant growth in gas supplies is possible. “This is definitely a special opportunity and something that our customers are preparing for.
“It would be very harmful. We believe this would mean a 2.5% drop in UK GDP next year.”
Felix Hüfner, senior economist at UBS, said economic data across Europe “all point to things getting weaker”.
“Our baseline scenario assumes no gas rationing or a further drop in supplies to Europe, which now looks increasingly optimistic.
“The likelihood that downside risks will materialize has increased dramatically, particularly that we have higher energy prices and rationing.”
Across Europe, governments are taking the prospect of serious gas supply problems seriously. Germany began rationing hot water, dimming street lights and closing swimming pools last month, while EU member states recently agreed on a proposal to ration gas supplies.
Meanwhile, the International Monetary Fund (IMF) has released simulations that see some European countries plunge into deep recession if they lose access to Russian gas, with Hungary, Slovakia and the Czech Republic seeing their economies shrink by up to 6 percent. Germany and Italy will also be hit hard, the IMF said.
The Bank of England’s recession warning is too “optimistic”, economists warn
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