London (CNN Business)Across the United Kingdom, businesses and households are warning that they won’t make it through the winter without help from the government. That sets up enormous challenges for the incoming prime minister, who will be announced this week.
For months, the United Kingdom has endured a leadership vacuum while the country has skidded toward a recession and a humanitarian crisis triggered by soaring energy bills.
Since Boris Johnson announced he would leave office in July, the outlook for growth has weakened. Annual inflation is running above 10% as food and fuel prices leap. Frustration over the rising cost of living has compelled hundreds of thousands of workers who staff ports, trains and mailrooms to go on strike. The British pound just logged its worst month since the aftermath of the 2016 Brexit referendum, hitting its lowest level against the US dollar in more than two years.
“It’s just one blow after the other,” said Martin McTague, who heads up the UK’s Federation of Small Businesses. “I’m afraid I can’t find any good news.”
The situation could get much worse before it gets better. The Bank of England anticipates that inflation will jump to 13% as the energy crisis intensifies. Citigroup estimates inflation in the United Kingdom could peak at 18% in early 2023, while Goldman Sachs warns it could reach 22% if natural gas prices “remain elevated at current levels.”
The contenders to succeed Johnson — current foreign secretary Liz Truss and former finance minister Rishi Sunak — face calls to announce a dramatic intervention as soon as one of them becomes the fourth Conservative leader of the country in a decade.
The most urgent problem will be dealing with the skyrocketing cost of energy, which could unleash a wave of business closures and force millions of people to choose between putting food on the table and heating their homes this winter. Experts have warned that people will become destitute and cold-weather deaths will rise unless something is done fast.
“Everybody is assuming that there will be a swift and decisive announcement that puts this issue to bed, or at least provides people with reassurance,” said Jonathan Neame, who runs Shepherd Neame, Britain’s oldest brewer. “If there’s not, that person will come under very considerable pressure.”
An energy ‘catastrophe’
Energy bills for households will rise 80% to an average of £3,549 ($4,106) a year from October. Analysts say the household price cap could rise to more than £5,000 ($5,785) in January and jump above £6,000 in April ($6,942).
As people are forced to reevaluate their budgets, the boom in consumption that followed the Covid-19 lockdowns is dissipating fast. The Bank of England has warned the UK economy will fall into a recession in the coming months.
“The key challenge that the energy price surge poses is that households that use lots of energy — and in particular poorer households — are going to really struggle to make ends meet,” said Ben Zaranko, senior research economist at the Institute for Fiscal Studies. “It’s going to mean really big cutbacks in other areas of spending.”
Meanwhile, Neame, whose portfolio includes about 300 pubs across southern England, said business owners are panicking. They’re getting quoted insane numbers for year-ahead utility bills, if they can find suppliers at all. Nick Mackenzie, the head of the Greene King pub chain, said that one location it works with reported its energy costs had jumped by £33,000 ($38,167) a year.
“It’s really daunting for a lot of businesses, especially the ones who came through Covid in a weakened state,” McTague said. “They’re now struggling to deal with another once-in-a-lifetime catastrophe.”
The crumbling British pound could exacerbate problems, making it more expensive to import energy and other goods, pushing inflation even higher.
It’s not the only reason business owners and investors are increasingly anxious. While job vacancies fell between May and July, they remain 60% above their pre-pandemic level. Finding workers to fill open roles has been a particular challenge in the United Kingdom since the country voted to leave the European Union. About 317,000 fewer EU nationals were living in the United Kingdom in 2021 than in 2019, according to the Office for National Statistics.
Brexit is also scrambling trade, particularly with the European Union, the UK’s largest trading partner. Exports and imports will be about 15% lower in the long run than they would have been if the United Kingdom stayed in the EU, the Office for Budget Responsibility has projected.
Dean Turner, UK economist at UBS, said it’s up to the new prime minister to try to make the most of the country’s position without creating further disruption. Yet hardline British lawmakers are still pushing to cast aside a key part of the Brexit agreement Johnson signed with the European Union, which could ultimately trigger a trade war with the UK’s biggest export market.
“Brexit’s happened. It is what it is, we’ve all got our own opinions on it,” Turner said. “But we’ve got to work with it to make it better for us, and I just struggle to see if there’s any momentum to do that.”
No easy solutions
Truss, who is expected to take the reins from Johnson after his government collapsed under a pile of scandals earlier this summer, has vowed to jumpstart the economy by slashing taxes. But many economists fear this approach could fan inflation and hurt fragile public finances, while failing to put money in the pockets of those who need it most.
“The benefits of cutting [taxes] would largely flow to the people who pay more tax, which are generally people with more money,” said Jonathan Marshall, senior economist at the Resolution Foundation.
There’s no way for the state to avoid paying huge sums to deal with the energy situation this winter, but targeted measures will be necessary to avoid waste. Freezing gas and electricity prices over the next two winters could cost the government over £100 billion ($116 billion), according to researchers at the Institute for Government.
“Energy is expensive, gas is expensive,” Marshall said. “To avoid people freezing in their houses, that needs to be paid for. But the state doesn’t need to pay for it for people who can afford it.”
There are also questions about how the incoming government will afford a large-scale economic intervention, especially if slashing taxes — and therefore government revenue — is the priority.
The UK government borrowed heavily to provide support during coronavirus lockdowns. The country’s debts are now almost 100% of its gross domestic product. When interest rates were at rock bottom, and access to cash was cheap, this wasn’t a major issue.
But that’s no longer the case. The Bank of England has been aggressively hiking rates as it tries to put a lid on inflation. That will make it increasingly expensive for the government to service its debt. The United Kingdom also has issued a large number of inflation-linked bonds, adding to its vulnerability.
“It’s almost a perfect cocktail of challenges that make public finances look at risk in a way they haven’t in recent times,” Zaranko of the IFS said.
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