Both the economy and the currency of Great Britain are under threat of further energy leakage.
Being at the end of the line of any energy trickle from Russia across the continent, and with that reduced supply becoming ever more precious, one wonders just how much will land in the UK as the long winter ahead progresses.
All of Europe, following a strident summer, is in hope of a warmer than usual winter too. That though may be harder to come by.
One extreme often leads to a pendulum swing to the other. Should Europe endure a typical winter, or worse, things will be tough for everyone. Nations between any gas supply, and there is the chance it may increase from current levels, and the end of the line UK will be keen to secure adequate quantity for their populace.
With Brexit, the UK may find itself slightly less favoured than may once have been the case. The situation for the UK is likely to greatly encourage an accelerated search for more fossil fuel supply in the North Sea.
In the meantime, still higher energy costs for the UK populace appear unavoidable. The further damage this will do to consumer confidence and business investment should not be underestimated and could be profound.
For some time, I have been forecasting a ‘dark’ recession in Europe. The UK may well suffer a similar fate. The USA and other countries simply cannot make up all the slack. The energy crisis for the entire region will reach a crescendo through the coming winter.
Much of the downside risk for the economies of Europe and the UK has to some extent already been priced in by financial markets. The full force of serious recessions, however, is something investors have preferred not to think about.
For the UK, it could get even darker. The suddenness with which the sun may set could catch many by surprise. Policymakers will be racing to find solutions. Household support will increase, but how to resolve any actual shortages and outages is far more problematic.
Hopefully, the worst case will not evolve regarding energy and basic heating, but simply ongoing concerns in this regard are likely to crimp consumer and business behaviour. And this reticence alone, could well pave a path to recession.
At some point, the Bank of England will have to slow or cease rate hikes. At which time the Pound will again fall off a cliff.
‘Pound Parity’ is not something yet widely discussed, but it is now very much on the horizon.
A distant horizon to be sure, but is there in sight?
And within 6-12 months, this may be a destination visited by all currency market participants. Corporations will need to adjust their currency exposures quickly. While the complex mix of a lower currency being supportive of the economy, but presenting further damage to energy costs, is a conundrum few if any policy makers or central bankers will be able to find a way through.
Difficult times still, for the UK and the Pound.
Short term target 1.0800. Medium term risk is clearly Parity.
Which may become a form of speculative self-fulfilling prophecy. On top of the dire economic realities confronting the nation
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
