UK energy crisis package 'to limit recession'

The UK Government's package to reduce the effects of surging energy prices on businesses and households could limit the damage of any recession, according to economists.

Close Up Of Woman Holding Smart Energy Meter In Kitchen Measuring Energy Efficiency

David Sapsted

8 September 2022

In the House of Commons on Thursday, Prime Minister Liz Truss announced that average household energy bills would be capped at an annual rate of £2,500 for two years from October. The statutory cap had been due to hit £3,549 with a further, substantial rise expected early next year because of the effects of the Russian invasion of Ukraine.

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Businesses to get energy cost support

Businesses have been promised an as-yet unspecified package of "equivalent support", but one only due to last six months, with a review of its efficacy pencilled in halfway through.After those six months, Ms Trust said there would be further targeted support for "vulnerable industries" although those sectors were not specified beyond the hospitality industry.In a bid to boost the UK's energy supply, the new Prime Minister announced a lifting of the ban on fracking to extract gas and oil from shale rock, which the Government believes could see a new gas source coming on stream in as little as six months.Additionally, a new round of offshore oil and gas licensing will be held, perhaps as early as next week, which is expected to result in more than 100 new licences being issued to drill in the North Sea.There will also be a new agency created - Great British Nuclear - charged with getting the UK to generate 24 gigawatts of nuclear power by 2050.

A recession "less likely"

Salomon Fiedler, an economist at German bank Berenberg, said: "Because the programme does not specifically target the most needy, but is rather broad-based, it will be relatively expensive."The support package for households may cost around £100 billion - over four per cent of UK GDP. Further measures for businesses may take the total price tag to around £150 billion. It seems likely that this spending will be mostly debt-financed."Samuel Tombs, Chief UK economist at Pantheon Economists, said a recession now looked far less likely, as consumers would have more money to spend on other goods and services.Paul Dales, Chief UK Economist at Capital Economics, agreed the package would limit the size of the recession predicted by the Bank of England, but would also mean higher Government borrowing in future."It seems that the size and structure of the Prime Minister’s policy to freeze utility prices is broadly as expected and will reduce inflation and limit the size of the recession," he said."But it will come at the cost of higher interest rates and higher government debt, although we estimate that this policy on its own won’t break the Government’s main fiscal mandate."

Inflation to peak sooner

Goldman Sachs also forecast that inflation was now likely to peak in October at around 10 per cent, significantly lower - and sooner - than its previous forecast of 14.8 per cent in January.Jake Finney, Economist at PwC, agreed, telling the BBC that inflation was already "at or close to its peak of around 10-11 per cent - significantly lower than our expected peak of 17 per cent".Paul Johnson, Director of the Institute for Fiscal Studies (IFS), said the Government had brought "us, and itself, some breathing space" amid the global energy crisis.But he added: "It needs to be immediately working out its exit strategy from this huge and costly intervention. It is concerning that it appears to be committing to this policy through next year as well as this."It is perhaps forgivable not to be able to come up with something better designed and better targeted right now. Surely, there should now be a concerted effort to come up with something better for next winter. Failure to do so would be enormously costly."