Closing summary
A quick recap:
UK inflation could jump above 20% next year if natural gas prices remain elevated in the coming months, Goldman Sachs economists have warned.
The investment bank warned that high inflation will push the UK economy into recession.
Goldman economists, led by Sven Jari Stehn, told clients:
Concerns around cost-of-living pressures in the UK have continued to intensify on the back of the worsening energy crisis, with Ofgem raising the energy price cap for households by 80% from October.
GS has downgraded its growth outlook sharply and now expect the UK to enter into a recession starting in October-December.
Goldman’s base case is that inflation jumps to almost 15% in January when the price cap is next lifted, and that the UK suffers a relatively shallow recession.
Goldman warned that “persistently higher gas prices” are an upside risk to its forecast. If gas prices remain at their current extremely high levels, inflation could surge to 22%.
In that scenario, Goldman estimates that real GDP would likely shrink by around 3.4%, as inflation would have such a large hit to real disposable incomes.
That would be a severe blow to households and businesses, with millions of families already struggling to cope with rising bills, and firms warning they may be forced to close.
Thousands of pubs face closure without urgent government support to soften the blow from soaring energy bills, the beer industry warned, putting jobs at risk across the sector.
Russia’s Gazprom tightened the squeeze on Europe, by cutting supplies to France’s Engie utility.
France’s energy transition minister Agnes Pannier-Runacher said Russia was “using gas as a weapon of war”, meaning the country must prepare for the worst case scenario of a complete interruption of supplies.
But there is good news today – UK and European gas prices have dropped, on optimism that Europe has filled more of its winter gas storage than expected. The day-ahead UK gas price is down over 20%, although still at very high levels compared to normal times.
Europe is also pledging to intervene in the energy market, reforming the market and breaking the link between electricity and gas prices.
Very good to see wholesale gas prices plummeting across Europe today - data from @tEconomics pic.twitter.com/eM7eem7ZHa
— Chris Giles (@ChrisGiles_) August 30, 2022
Outgoing prime minister Boris Johnson warned that people face a “tough” time as the cost of living rises.
His likely successor, Liz Truss, is expected to approve more oil drilling in the North Sea if she wins the Conservative leadership election, drawing criticism from environmental campaigners.
Concerns that the UK economy is heading to recession have pushed the pound to its lowest since March 2020.
Some struggling families have been borrowing more to pay their bills – credit card borrowing jumped at the fastest rate since 2005 last month.
Germany’s inflation rate has hit its highest level in almost 50 years. Harmonised CPI jumped to 8.8% this month, statistics body Destatis estimates, with energy prices up over a third and food prices rising by around 16%.
In other news…
Journalists at newspapers including the Daily Mirror and Daily Express could go on strike this Wednesday, after talks with the publisher, Reach, over the weekend failed to resolve a stalemate over pay.
The Indian tycoon Gautam Adani has been named the world’s third richest person with an estimated $137bn (£117bn) fortune, partly thanks to the jump in energy prices.
And the number of job openings in the US has risen back towards a record, with over 11.2m openings recorded.
US jobs openings unexpectedly climb back near record levels, as per the latest JOLTS data. Not what the Fed wants to see, based on recent commentary. pic.twitter.com/QzLJomtrlX
— Lisa Abramowicz (@lisaabramowicz1) August 30, 2022
Updated
Goldman Sachs’ warning that inflation could hit 22% is the latest “startling” forecast for the severity of the crisis that’s unfolding in the UK, says Bloomberg.
Hopes are fading that inflation will peak in October, due to the dramatic surge in gas prices in the last few weeks.
Goldman’s outlook is even more gloomy than a prediction last week from Citigroup, which price gains peaking at 18.6%, well above the 13% figure the Bank of England forecast earlier this month. More here.
Updated
