Written by 8:37 am EU Investment

UK About to Go “Super-European” says Berenberg

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“Coming in with a bang,” says Holger Schmieding, Head of European Economics at Berenberg, addressing reports that incoming UK Prime Minister Liz Truss could make a major intervention in UK energy markets.

“Responding to the cost-of-living crisis, new UK leader Liz Truss is reportedly considering a big intervention in energy markets of up to £100BN,” he says.

But some reports out Tuesday suggest the scope of the freeze is more generous and could cost £130BN over the next 18 months.

Truss is also reportedly finalising plans for a £40BN support package to lower energy bills for businesses.

Economists are of the view that an intervention of this scope would radically reduce the peak in UK inflation that is likely to fall in October, when energy bills rise again.

“Such a price freeze would make a major difference to inflation,” says Schmieding.

Back-of-envelope calculations by Berenberg suggest if household energy bills remain constant instead of rising in October and again in January, UK inflation could be around 3 percentage points lower in the fourth quarter.

And they could be some 4ppt lower in the first quarter of 2023 than otherwise.

UK inflation forecasts

Above: UK inflation forecasts made by the Bank of England in October showing the significant role played by energy.

On its own, that could take Berenberg’s forecasts for UK inflation from 12.8% year-on-year to around 10% for the fourth quarter and from 13.3% to around 9.5% for the first quarter.

In short, this radically alters the economic outlook for the UK which, according to some economists, is amongst the worst in the developed world.

Indeed, Berenberg says the UK could be set to offer the biggest support package of any European country.

“So far, the UK has offered less support to households than most other European countries. If Truss goes ahead with the reported idea, the UK would go super-European, intervening more than many EU governments,” says Schmieding.

Berenberg calculations suggest a shallower peak in inflation would mean the UK recession is somewhat shallower than previously projected.

But this is not a cost-free approach.

“Such interventions merely re-distribute the energy price pain over time from current households to future taxpayers,” says Schmieding.

“The cap would also reduce the incentive for households to save energy. That could add to potential problems for other energy users,” he adds.

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