Soaring energy prices threaten Britain's economic future​

By Jake Rickman​

What do you need to know this week?

Last week, a British research firm estimated that by next year, the average annual cost of energy for UK households could feasibly exceed £5,000. Another recent estimate places the cost at around £4,300. The current price cap, which is the price most households pay, is slightly under £2,000, though this is set to jump to more than £3,000 in October. Households are currently paying nearly twice as much as this time last year. If the highest estimates are reached, households would be paying more than 500% compared to prices in the winter of 2019-2020.

The Conservative government announced in May a package that would shave £400 off the annual price for all households regardless of income plus an additional set of measures for low-income households. However, Labour and the Liberal Democrats have said these measures do not go far enough given the most recently revised estimates. Labour has said they would freeze prices at the current levels to prevent approximately one-third of households from falling below the poverty level if they held the government.

The Tories have indicated that they will not move ahead with any further proposals until they decide on their next leader. However, the International Monetary Fund (IMF), known for its affinity for austerity policies, has criticised Labour’s proposal on the basis that it will not drive fuel prices down because widespread relief measures will not encourage energy rationing.

Why is this important for your interviews?

The economic woes household consumers face may seem rather remote from the market, but the truth is that this could pose a grave threat to the future of the UK’s economy. The nation’s economy has already contracted by 0.1% in Q2 (Quarter Two) 2022 — something largely owed to a mix of inflation, energy price increases, tightening monetary policy, and declining consumer confidence and spending.

If the next quarter follows the same trend, the UK will be in a technical recession — all before the full extent of the household energy price hikes take hold. A reasonable conclusion is that unless steps to relieve household cost pressures are taken, the floor on consumer demand could drop out. This would substantially impair any possibility of recovery in the economic short-term because this would transform a supply-side economic recession into one that now has a significant demand-side factor. The ultimate effect would be that manufacturers and service providers retreat from the domestic market because of its poor growth prospects (provided they do not go bust).

How is this topic relevant to law firms?

Such an outcome in the worst case would be detrimental to clients and by extension, law firms. Especially those with clients predominantly operating in the UK, such as firms with a stronger regional presence (the exception being for those with robust restructuring practices).

If the UK’s sluggish growth (or lack thereof) persists for years, as some fear it might in a post-Brexit era, a broader question is what claim the City of London might have as the ostensible financial capital of the world.

While there are many reasons corporate and financial markets clients might opt to stick around the City — the eminence of English law in international transactions and mere tradition being the most compelling — there are other factors that threaten the Square Mile’s hegemony. In outline, these include:
  • further regulatory divergence from the EU following Brexit, which makes it increasingly difficult for companies to operate in both jurisdictions;
  • the perception of sustained political instability and
  • the threat of currency volatility (something presently rather remote).