Bank of England warns the UK will fall into recession this year
bbc.co.uk
bbc.co.uk
There is nothing the BoE can do to directly address the supply-side inflationary pressures we're facing. What they should be focused on right now is where inflation expectations are likely going to be given their economic forecasts, and while those forecasts do suggest double-digit inflation numbers, they also suggest recession. While some monetary tightening was clearly needed, this has been a period of historically aggressive monetary tightening, to tackle inflation pressures that they have next to no control over, into a recessionary environment, during a time when people are struggling to pay their energy bills - let alone their mortgage and other repayments linked to interest rates.
If their transitory inflation call wasn't bad enough, they're now about to follow that with an even larger policy mistake which will push thousands of people into poverty, with many likely to lose their homes and jobs as a direct result of this move. Well, that's my opinion anyway. I think this 0.5% move after 5 consecutive 0.25% hikes given the economic risks is insane.
The economic consequences which would result from the COVID lockdowns, monetary stimulus and fiscal stimulus was something I warned about repeatedly during 2020-2021. We're screwed whatever we do now and I agree recession is unavoidable at this point. Many people are about to lose everything and many will die as a result of fuel poverty whatever the BoE do. All they can really do now is try to limit the pain.
On whether rate rises are needed, you're assumption is that persistant inflation is a concern, and I don't agree with this. The inflationary pressures we face are mostly a result of fuel prices which aggressively increasing rates will do nothing to solve. For you to be right you have to explain both why you think increase rates will control inflation we're seeing (it won't) and why you think inflation expectations will remain high in a recessionary environment (unlikely). In addition to this you also have to explain why further rate rises on top of the 5 prior raises is required. We know it takes time for rate rises to take effect so aggressively raising rates like this presents huge risks if economic data deteriorate in the coming months.
If the BoE is concerned about inflation expectations, then the question to ask is why this wasn't a concern in 2021. Now recession is imminent inflation expectations shouldn't be as much of a concern.
Central banks can only do so much when governments are hell bent on setting fire to the whole system.
Interest rates are a blunt instrument and unfortunately the least able to afford them are likely to suffer most. I’d support targeted government spending to those most impacted during a high inflation recession to limit the pain. I believe the PM candidate (Truss) policy to reduce taxes is misguided.
The truth is, we are probably both going to be wrong about the best way to solve this.
Commodity-led inflation might well be on its way down, but unless you do something about rampant rental inflation, it will mean nothing.
A 20% increase in your monthly gas bill hurts. But a 20% increase in your monthly rental can be life destroying.
Oil and gas price increases are due to high industrial and demand. Their supply is at record levels.
What is truly insane is inflation being greater than 10% and interest rates being only c. 2%. There is a reason why the BoE theoretically targets 2% above all other metrics. Unfortunately they have significantly deviated from this.
The only way for commodity prices to decline, or at least remain level, is a concerted increase across the board by the major banks to reduce demand.
For example, people may choose to save their money, or not borrow (given higher interest rates), instead of buying fuel, but that is unlikely to affect it's price.
This seems more like an attempt to strangle wage increases.
For example, in the US, recent interest rate hikes led to even larger mortgage rate hikes. The increase in mortgage rates had the effect of making it more difficult for people to afford homes. Once mortgage rates started rising here, I started to see a reduction in homes sold and it has started to lead to a slight reduction in home value.
It is that and more. There aren't many levers to pull but one that is available is interest rates which in a kludgy way allows you to slow down investment in businesses which in turn results in preventing wage increases, hiring, and eventually results in an increase in terminations or eliminating positions. Less money going to workers means less money can be spent in the economy and less demand for goods and services. Inflation then drops or depending on severity bursts some bubbles and enters into a deflationary period. So yes the whole point is to cause painful decreases or elimination of wages.
Low rates -> more money flowing into housing markets -> higher rents
The issue right now is that demand is actually being ENCOURAGED by low interest rates and continued quantitative easing. Don't be fooled, 2% is still a low interest rate historically speaking.
Basically spenders need to be encouraged to save.
We'll probably see rebate checks go out, or at least programs to give money to low-income families for their bills, but they probably won't send those out until February or so.
People are going to be wishing for global warming at that point.
[] https://www.gov.uk/government/news/400-energy-bills-discount...
Let’s just see how the electricity situation works out in the winter.
On the other hand even electric heaters must draw from somewhere, and it's looking like it might be coal.
That will also be fun. I just made a new electricity contract, from 0.26€/kWh for my current one, it will be 0.42€/kWh and that price is only because I changed to a 24 months contract (gambling prices won’t fall in a year).
I guess it’s better than freezing, but those heaters will be expensive.
Many people have actually predicted it. Not economists, though.
Same as the rise of Covid 19 was reported as far back as November 2019 on the same feeds.
The problem is no one competent is at the wheel and the default policy is keep the spice flowing and hope the fuck the problem goes away and when everything goes to crap, blame it on "external factors" or something.
Edit: I think really it's "politically inconvenient" to have issues at some times so they hide them.
And no, it is not early days and the cheap money is all gone, thus all companies funded with 98% of VC money and having little to no revenue in return for years, cannot hide and aren't going to survive that long, especially in a recession.
>Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
I'm not an economist, but another comment has already expressed skepticism over that claim.
The reason the US I presume you're talking about is hiding it and pretending it's not happening is because things are about to get way worse and you'll be begging for what prices are right now in a few months.
They'll only play those cards when it gets as bad as they're anticipating.
The UK government is anything but "realistic and honest" about all the forces at work; they are collectively still in deep denial about the impact of Brexit.
It seems to make more sense to base economic policy on finding choke points and vulnerabilities, and addressing them before they get triggered. Wars from without are unpredictable, but you can prepare for the disruption from within. Economic forecasts by contrast seem like soothsaying.
The primary reason they failed was BECAUSE of the Russia shit storm. Predictions about anything are vulnerable to change from new information. That doesn't mean making predictions is a bad idea. It's still the best model you've got.
The problem with predictions is that an event might be 99% likely to happen, but it might still be prudent to consider the 1% of cases where it doesn't happen if that's sufficiently high impact.
Forecasting is always a questionable activity. All models are wrong, some are useful.
> All models are wrong, some are useful.
A forecast that causes you to act overconfidently is worse than no forecast. All models are wrong, but some are worse than nothing.
It's not a proof by contradiction. It's showing that there are many long tail risks that are potentially very dangerous but also very expensive to try and prevent. It's not wrong, it's just a really difficult concept. The Fed interest's rate is a single tool that can be moved up or down.
What do you do with no model? How do you make decisions? Every decision, including making no changes, is very significant.
https://www.forbes.com/sites/adamstrauss/2021/07/30/here-are...
[1] https://www.theguardian.com/business/2022/may/30/could-a-car...
[2] https://voxeu.org/article/eu-gas-purchasing-cartel-framework
If you force oil prices to stay low such that they do not reflect supply-demand dynamics, you are not solving the fundamental problem. Supply and demand imbalances do not disappear when you fix the price - they are exacerbated.
This is a farce. There's not enough oil because OPEC+ has decided there is not enough oil. They can easily increase supply, causing the price of oil to be more consumer friendly, but no, won't someone think of their profits?!
But yes, the core of what you were saying is correct; there is no shortage of oil presently. That said, it's important to consider different sources of oil, and the cost of harvesting them. Shale is a LOT more expensive to harvest than conventional wells, and things like Tar Sands step things up even further. We shouldn't worry about running OUT of oil in the next couple decades by any means, but the ramp up in cost should have us at least considering other options for avoiding ever-increasing energy costs, such as nuclear. Underestimating the importance of an energy supply is worth avoiding -- much of the Roman decline can be attributed to the marked reduction in available lumber. Much of what allowed the global powers of today to get that way was moving from wood to coal to oil/gas, and then a bit into nuclear -- being hesitant to continue this transition shouldn't be done without the understanding that failure to expand energy resources will necessarily cause an inability to expand, and eventually a need to contract as a civilization.
As oil is also used for most modern fertilizer, food production is the other side of this coin, and unfortunately, unlike the options in energy production, there don't seem to be any immediately available remedies that assist with large scale food production that allowed us to get a global population of over 7 billion. Again, this isn't an immediate emergency, but it's on the horizon, and does represent an existential threat to modern civilization; as such it shouldn't be ignored.
Further -- the medium and short term supply of oil is determined by existing infrastructure, which already exists. (Oil sands facilities in Canada, for example, were extremely expensive to build, but are now profitable if oil is at $20 a barrel.)
To say that oil companies won't increase supply if prices go down is like saying you'll stop breathing if there's less air. You'll actually, in all likelihood, just breath more.
In terms of supply -- the amount of supply very closely matches demand. A shift of less than 1% of supply versus demand shouldn't be allowed to send the economy into a recession, much less subsidize Russia's war efforts.
Supply/demand can (and should) be mediated by sensible regulations. Just as with drug pricing -- buyers should be able to negotiate. Oil sellers operate cartels. Buyers should as well.
Right. Instead, we (the UK) have two candidates that want to cut taxes for the individuals instead of making real change. BP has made 3x net profit compared to last year. ExxonMobil made 4x net profit compared to last year. Other energy companies have also raked in the profits. But yes, tax cuts will definitely help the poor, and not the rich!
the reason energy bills are so high is energy companies thought they could get away with it, and they did. Shell just reported massive quarter profits. and the Uk will just let them scoot free
Brexit is basically a religion for the current Conservative party, and it absolutely can not be questioned, or criticised.
Johnson is a liar. Trump is a bullshitter. Johnson knows what the truth is, and is actively trying to deceive or confuse you. Trump has no idea what truth would be even in principle, he's just making whatever noises seem to work.
Probably this makes Johnson a worse person, and Trump a worse leader? I'm not sure.
The mistake was selling off the rights of fossil fuels to private companies in the first place.
This will fail for a few reasons:
* We import 101 other things from the EU (from food to medicine to electricity), if we bad export of energy, they will stop exporting those in retaliation.
* We're not that independent, we might be close right now (because it's the height of summer) but we desperately need Norway and Belgium's gas come the autumn
* Energy is a raw material in basically every manufactured product (this is why the US usually refuses to export natural gas). What this means is, if you cannot export energy as gas, you end up just using it to make manufactured products and exporting those instead. So rather than cutting domestic bills, you just end up giving a huge subsidy to energy intensive industries (like steel and aluminium production). Maybe you want to do that (the US explicitly prefers manufacturing jobs to energy production jobs). But it won't actually cut prices, it will just move jobs from outside the export ban to inside it...
In the mean time anybody who can produce cheaper than the marginal price books a profit on the difference. In this case, a lot of it.
High fossil prices are a very fortunate thing though as we need to ramp down their use quickly to mitigate climate disaster, so this system is currently right by accident.
It usually results in low profits because the cost of production does not vary wildly between vendors. Farmer Joe and Bob have roughly the same costs per bushel of wheat, so farm profits are generally quite low.
Energy windfall profits are the exception, not the rule. Windfall profits are usually only found in non-commodity markets like software.
Basically the UK government told renewable energy providers that they'd top up their income to a minimum amount per unit of electricity, to de-risk investing in renewable energy and remove volatility in expected income.
If the electricity price rises, by one pence, then that's one pence less the government needs to pay them, and since people are the government, it's a (very convoluted) no-op, except that you're paying the money up front, and not in taxes.
It appears we're saving 10s of Billions via these schemes, but not sure exactly how much of that is just because renewables are cheaper than other energy providers, how much because of this particular scheme etc.
https://www.current-news.co.uk/news/cfd-projects-to-save-bri...
Shell might have massive profits, but it's a massive transnational organization and most of those profits are made outside of the UK.
The UK is not energy independent. Although it imports less than 5% of its gas from Russia, it is affected by global gas prices and demand. Most UK homes are heated by gas. The average energy bill was £1,400 a year in October 2021. In April 2022, energy bills rose to around £2,000. It is estimated bills will rise to £3,400 a year from October, then to £3,600 a year from January 2023 [1]. Unless I am mistaken, these are some of the highest energy bills in Europe.
Meanwhile, the currently government has no plan or urgency to tackle the cost-of-living crisis. Instead, we have a navel-gazing Conservative party pre-occupied with who should be Prime Minister. (A choice between two terrible candidates).
[1] Warning winter energy bills to rise by more than expected https://www.bbc.co.uk/news/business-62380728
A lot of it correlates well with COVID related disruption to supply, QE, and stimulus spending, and well before Putin's alleged price hikes.
I find it very funny when the media(not to say the establishment at large) either tries to hide the economic situation or blame it on their political opponents. Blaming Russia is not the entire issue, i'd say locking down the globe for 2 years for essentially no reason is a bigger problem, but then again people who were saying there would be repercussions for lockdowns were quickly shunned. After Russia the next boogeyman will be climate change, after that: who knows, maybe WW3 or China. All of them are real concerns on their own but none pinpoint the actual issue: western leadership that promotes policies that facilitate the very top of the "economic iceberg" instead of the vast majority of the people(think increasing the middle class).Most of the people represent the economy, so even if you have record-setting profits for corporations, the economy still performs poorly.