Ian McConnell: Energy price crisis: UK’s woeful lack of energy security leaves us at mercy of winter

Euphoria or at least relief over the easing and then ending of coronavirus restrictions on the back of vaccine success – which enabled a bounce in economic activity – has turned to fears of recession as the cost-of-living crisis has become all-encompassing.

Official data on Monday showed UK gross domestic product grew by 0.2 per cent month-on-month in July. However, this rise was only half the 0.4% increase projected in a poll of economists by news agency Reuters, and it followed a decline of 0.6% in June related to the Platinum Jubilee bank holiday. Moreover, economists were quick to highlight the prospect of UK recession as the GDP figures were published.

READ  MORE: Ian McConnell: Rees-Mogg moves on from unnecessary role in fascinating appointment by Truss 

Comparing the three months to July with the February to April period, UK GDP was flat.

That is worrying, given the full misery of the surge in energy bills, even with the belated but significant intervention by Prime Minister Liz Truss after the Tories’ excruciatingly protracted leadership contest eventually came to an end last week, has yet to be felt by households.

The National Institute of Economic and Social Research think-tank, which had predicted the GDP data for July would be even weaker than it was, emphasised the “outlook remains one of recession”.

It said: “We still expect the UK economy to contract by 0.1% in the third quarter...as inflation maintains its drag on consumer demand and confidence.”

Construction and production output fell in July, with GDP growth driven by services.

Stephen Millard, deputy director for macroeconomic modelling and forecasting at the NIESR, declared: “GDP in the three months to July was flat relative to the previous three months and we think the UK economy remains in recession.”

Data from the Office for National Statistics last month showed UK GDP fell by 0.1% in the second quarter.

The Bank of England is forecasting the UK will enter recession in the fourth quarter of this year.

Whatever the exact timing, the picture is clear: the economic outlook has declined dramatically since late last year as the inflation crisis has developed.

And this is clearly demoralising for households, which have had to endure the global financial crisis, Tory austerity, and the coronavirus pandemic and its economic impact, and continue to see their living standards eroded by the Brexit folly.

Annual UK consumer prices index inflation had by July surged to 10.1% – more than five times the 2% target set for the Bank of England by the Treasury. And it is projected to rise significantly higher.

Ms Truss has moved to cap annual energy bills for dual fuel for a typical household at £2,500 for two years.

This, by the time it was eventually announced last week, was a huge relief, given the previously planned rise to £3,549 from October 1 and what were far, far worse projections still for the energy price cap from January 1 and April 1 next year.

However, there is a danger that, amid this relief, we forget the slightly longer-term context.

The energy price cap prevailing last winter was £1,277 per annum. This rose by 54% to £1,971 from April 1 this year. And the £2,500 figure that will be implemented from October 1 is about double the cap that was in place for last winter.

READ MORE: Former Watt Brothers store: Sandy Easdale: 'Real risk' building 'will lie vacant for years' after council rejects hotel plan

There is a general £400 per household discount on electricity and gas bills but this, it is clear from the numbers, does not get anywhere close to addressing the leap in the cap even following the government intervention which is, including help being provided to businesses, expected by experts to cost up to £150 billion. The cost will be financed by the Government through increased borrowing.

Given the energy bills crisis and more general cost-of-living woe, it has not been surprising to see pollster GfK’s UK consumer confidence measure fall to its weakest since comparable records began in 1974.

And one thing is clear: it would be foolish to think the dramatic drag on the UK economy from the country’s electricity and gas price crisis is behind us now that Ms Truss has finally intervened. This crisis, while driven very significantly by global factors, also of course reflects the Tories’ dismal failure to ensure energy security.

And the degree to which the country is at the mercy of winter weather was underlined in economic forecasts published last week by PricewaterhouseCoopers.

The accountancy firm said: “PwC’s expectation for the UK as a whole is that year-on-year changes in economic output will range between -1.3% to 0.2% in 2023 and between -0.3% to 0.6% in 2024, under the ‘harsh winter’ and ‘mild winter’ scenarios respectively.”

READ MORE: Exclusive: Scottish airport chief reveals his departure decision

Its “mild winter” scenario is one “in which there is recovery of some supply of Russian natural gas exports, a reduction in gas prices to their September 2022 starting level, and where the UK Government provides considerable support in response to the cost-of-living crisis”.

The “harsh winter” scenario is defined as one in which “the supply of Russian natural gas exports to Europe remains highly disrupted, with gas prices remaining around their recent high point, and where the UK Government’s support is more considerable than our mild winter scenario but less able to mitigate the adverse impact of high gas prices, [and] demand management reduces energy usage particularly by large industrials”.

We clearly all have to hope, for the sake of the economy and living standards – and so that the inevitably grim fuel poverty faced by millions of households is at the least-bad end of the spectrum of unpalatable outcomes – that we have as mild a winter as possible.

The UK has looked helpless as global energy prices have surged, following years of entirely inadequate planning and investment on this front as short-termism has abounded, with the Thatcher-era privatisation bonanza having led the country to a most embarrassing, dependent place.

And it is lamentable and worrying that, in terms of both household finances and how much the Government will have to borrow for its assistance with energy prices, we are so much at the mercy of the weather this winter.