Britons face an even worse hit to living standards and a longer recession than the Bank of England expects as Russia poses a greater threat to Europe’s gas supplies, economists have warned.

Experts said even the Bank’s most pessimistic scenario did not take into account the likelihood that gas prices, which have doubled in three months, will rise further.

That calculation now looks “increasingly optimistic”, investment bank UBS has said, while analysts at Capital Economics have warned that it is now “possible” for Vladimir Putin to completely halt gas flows from Russia. towards Europe.

Despite a number of increasingly severe warnings about the risk of gas shortages in Europe, the Bank of England said it did not need to consider the potential impact of this scenario.

A Bank source said the purpose of his report was not “to construct the worst-case scenario by plugging in more and more potential inflationary pathways for energy.”

It came after the Bank issued one of its bleakest economic outlook on Thursday, while raising interest rates and adding pressure on household budgets,

The Bank predicts a deep recession will hit before Christmas and last through next year, with incomes down by a record amount, inflation peaking at 13.3% and near zero economic growth until the end of 2025.

But none of the Bank’s modeling took into account rising gasoline prices, a scenario that analysts say is now one in five possibilities. Oxford Economics said it was difficult to set an upper limit on how gas prices could rise if supplies started to run low.

A further rise in prices is now more likely than a decline, said Paul Dale, chief UK economist at Capital Economics. “You could see a further increase in gas prices, which then stay higher for longer. We don’t expect gasoline prices to come down quickly.

“The Bank is essentially forecasting stagflation and suggesting the drug raise interest rates. It is truly remarkable.

Although the Bank has not modeled the impact of a price hike, the figures it has released indicate that it estimates that every 25% increase in gasoline prices would raise inflation by 1 percentage point. percentage point and reduce economic output by 0.6 percentage point.

If gasoline prices were to double again this winter, inflation would hit 17.3% and the economy would collapse 4.6%, a bigger drop in a single year than during the global financial crisis. of 2009.

Edward Gardner, commodities specialist at Capital Economics, said gas prices will remain “very high” in the near term.

“There is clearly an upside risk to prices as Europe is still dependent on Russian gas. If Russia were to completely cut off supplies and we had a cold winter, that would be a perfect storm scenario.”

Wholesale prices are ten times higher than they were just over a year ago.

Capital Economics estimates prices would rise to €250 (£211) if Russia cuts supply further. However, Mr Gardner said prices could still rise much more.

“When you have shortages of products that people need for their basic needs, it’s about who has the biggest pockets?”

“Unfortunately, many people will not be able to afford these prices.”

He added: “Russia has gotten a head start on Europe’s desire to gradually reduce its dependence on Russian gas. Europe wants to reduce its dependence on Russia by two thirds by the end of this year. Russia has already done it for us. There is clearly a risk that it will force Europe to reduce its dependence even further.

Andrew Goodwin, the chief UK economist at Oxford Economics, said a further significant increase in gas supply was plausible. “It’s definitely a distinct possibility and something our customers are preparing for.

“It would be extremely damaging. We believe this would mean UK GDP would fall by 2.5% next year. »

Felix Huefner, senior economist at UBS, said economic data from across Europe, “everything indicates that things are getting weaker.

“Our base case assumes no gas rationing or further cuts in supplies to Europe, which now looks increasingly optimistic.

“The likelihood has risen sharply that downside risks will materialize, particularly that we have higher energy prices and rationing.”

Governments across Europe are taking the prospect of major gas supply problems seriously. Germany last month began rationing hot water, dimming its streetlights and closing swimming pools, and EU member states recently passed a proposal to ration gas supplies.

Meanwhile, the International Monetary Fund (IMF) has released modeling suggesting that several European countries would plunge into deep recessions if they lost access to Russian gas, with Hungary, Slovakia and the Czech Republic seeing their economies shrink. up to 6%. Germany and Italy would be…

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This notice was published: 2022-08-05 19:26:43