UK recession warning: Brits face eye-watering £2.5k hit as Putin's war could tank economy

THE UK is expected to receive a major economic blow from the fallout of Russia’s invasion of Ukraine with the threat of a possible recession now high.

Russian ruble falls to all-time low following economic sanctions

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British households were already bracing for a squeeze in the cost of living with inflation continuously climbing going into 2022 and April set to see rises in energy bills and taxes and National Insurance. Analysis by the Centre for Economics and Business Research (Cebr) now forecasts a fall in living standards equal to £2,553 per household as disposable incomes fall. Of this, £1,259 per household is due to the invasion of Ukraine which has seen commodity prices spike even higher. Oil is now regularly trading above $130 (£98.74) a barrel with fears this would likely be propelled higher if threats of an embargo on Russian exports comes to pass.

Russia also supplies 40 percent of the Eurozone’s natural gas meaning supply disruption here threatens to further swell already strained energy prices.

This week UK gas prices hit a record high of 650 pence per therm.

Renewed fears over supply chain shortages for manufacturing have also emerged given the role Russia plays in the production of key metals such as nickel and palladium.

On Tuesday the London Metal Exchange was forced to suspend trading in nickel after prices more than doubled.

Living standards

UK households face a £2,500 fall in living standards (Image: Getty)

Oil

Oil prices have soared following the invasion (Image: Getty)

Worryingly Cebr explained its analysis was not a ‘worst case’ scenario with some commodity prices now actually higher than assumed.

In its assessment it now predicts overall consumer price inflation to peak at 8.7 percent for the second quarter of 2022 and to remain above seven percent until the beginning of 2023.

The impact of sanctions and price rises is expected to serve as a major drag on UK growth this year.

Cebr now estimate GDP growth will be halved, now forecast at only 1.9 percent for 2022 with potentially zero growth in 2023.

Rishi Suank

The Chancellor Rishi Suank may need to put the economy on a ‘semi wartime setting’ (Image: Getty)

Some analysts are also predicting the hit to growth may be enough to trigger a widespread recession.

Thomas Pugh, economist at consultancy RSM UK, commented: “The chances of a recession later this year or early next dramatically increase if the conflict widens and oil prices move towards $150 (£113.93) a barrel.”

Meanwhile analysts at Saxo Bank noted: ” Skyrocketing prices for key commodities and power prices in Europe mean that a recession is baked into expectations for the eurozone economy this quarter.

“But the situation risks aggressively bringing forward a recession elsewhere, including in the US, where the sharp fiscal drag in the wake of peak pandemic stimulus almost exactly one year ago is an added factor.”

Such predictions are expected to weigh heavily on the government, with the Chancellor’s spring statement coming later in March, and the Bank of England due to decide on interest rates next week.

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Bank of England

The Bank of England will need to consider the recession risk (Image: Getty)

The Treasury has already intervened on energy prices with a rebate in October of £200 on energy bills which will then be repaid over the following years.

Cebr commented that the Chancellor will need to put the economy on a “semi wartime setting”, adding that the Bank of England will also need to factor in the likely movement to recession when setting interest rates.

The Bank had been widely expected to increase rates again this month though prospects for future rate hikes this year may now be lower than previous market expectations of up to 1.75 percent.

Paul Dales, Chief UK Economist at Capital Economics, predicted the Bank “may well raise interest rates to 1.00 percent or 1.25 percent in the coming months.

“But it wouldn’t be a complete surprise if the Bank were to move more cautiously.”

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William Murphy

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