The 2022-23 Economic Crisis Megathread

[crazy canuck]

From the Globe and Mail today. 

British consumer price inflation is set to peak at 18 per cent – nine times the Bank of England's target – in early 2023, an economist at U.S. bank Citi said on Monday, raising his forecast once again in the light of the latest jump in energy prices.

"The question now is what policy may do to offset the impact on both inflation and the real economy," Benjamin Nabarro said in a note to clients.

Consumer price inflation was last above 18 per cent in 1976.

The front-runner to become Britain's next prime minister, Liz Truss, was likely to come up with measures to support households that would have a limited offsetting impact on headline inflation, Nabarro said.

With inflation now set to peak substantially higher than the Bank of England's 13 per cent forecast in August, its Monetary Policy Committee was likely to conclude that the risks of more persistent inflation have intensified, the note said.

"This means getting rates well into restrictive territory, and quickly," Nabarro said.

"Should signs of more embedded inflation emerge, we think Bank Rate of 6-7 per cent will be required to bring inflation dynamics under control. For now though, we continue to think evidence for such effects are limited with increases in unemployment still more likely to allow the MPC to pause around the turn of the year," he added.

The BoE announced a rare half percentage-point interest rate increase earlier this month and investors expected another big move when the MPC makes its next scheduled monetary policy announcement on Sept. 15.

[Sheilbh]

Agreed. This IS a form of economic war, the pain of removing a critical vulnerability that made us subservient to an evil empire. You would think politicians would be more eager to make that argument.

I thin they're afraid to because it is rare for politicians nowadays to make calls for sacrifice from citizens, or bearing with difficulties. Covid is a rare exception and generally people in Europe responded incredibly well. Politicians don't seem to have learned that lesson.

More cynically citizens voluntarily sacrificing/enduring for a bigger cause is often associated with an expansion of rights or reciprocity from the state that the current crop of politicians perhaps don't want to follow through on.

[Sheilbh]

Interesting that Japan had announced they're looking at next gen nuclear. I suspect it's in part because they're a big LNG importer and that market's changing a lot with Europe entering to move away from Russian pipeline gas.

I mentioned earlier that Korean and Japanese importers publicly stated they want to buy a lot this winter which is odd, but I suspect for Japan (like Europe) things are pointing towards accelerating energy transition.

Edit: And worrying forecasts that (as hit the UK last autumn) wind generation is likely to be low across Europe, which means we're relying more on fossil fuels at a not great time.

Map from yesterday of day-ahead prices in Europe:


I believe the average in 2010-2020 floated around €40-100. As I say I'm not sure these are meaningful or helpful market signals any more and require state intervention (which will be expensive) and, probably, state allocation/rationing which will be a huge political challenge. The movement in the past fortnight alone doesn't seem to me to signal anything but just absolute shortage and distress:

[Sheilbh]

Another day and other record prices for German and French electricity forwrds - €725 and €870 per MWh respectively. Again the average for France and Germany in 2010-2020 was €41 MWh.

There's Russia, France is servicing nuclear plants which is taking longer than planned (and EdF have announced they won't be able to re-start until November), plus low winds and droughts affecting hydro. According to Javier Blas (Bloomberg energy columnist) French baseload electricity for Nov 22 - Jan 23 is now trading higher than €1,500 MWh peaking at €3,000 in December

Meanwhile - this tweet sounds like a threat:

Gazprom
@GazpromEN
Currently, none of the turbines of the Portovaya CS are undergoing repairs in Canada.

[Zanza]

German economy grew by 0.1% in Q2 (compared to Q1, I.e. not the annualized rate normally cited in America).

[Duque de Bragança]

Another day and other record prices for German and French electricity forwrds - €725 and €870 per MWh respectively. Again the average for France and Germany in 2010-2020 was €41 MWh.

There's Russia, France is servicing nuclear plants which is taking longer than planned (and EdF have announced they won't be able to re-start until November), plus low winds and droughts affecting hydro. According to Javier Blas (Bloomberg energy columnist) French baseload electricity for Nov 22 - Jan 23 is now trading higher than €1,500 MWh peaking at €3,000 in December

Meanwhile - this tweet sounds like a threat:

Gazprom
@GazpromEN
Currently, none of the turbines of the Portovaya CS are undergoing repairs in Canada.

That's bad news for France indeed, but "real" winters (in Eastern France) don't really start before November, more likely December.

[Syt]

Got my gas/electricity bill for last year. I get back 200 EUR because my usage was down. My prepayments for next year go from 10x 135 EUR to 10x 248 EUR, though (it's the gas; my electricity is all renewables).

[Tamas]

I signed a 3-year fixed contract in September last year. I hope there is no small print I missed which lets the provider (EDF) get out of it because it is shaping up to be an excellent move.

[Sheilbh]

I signed a 3-year fixed contract in September last year. I hope there is no small print I missed which lets the provider (EDF) get out of it because it is shaping up to be an excellent move.

I was speaking to a friend last night and he fixed in April. He's already paying less than half of what I do every month and it's only likely to get worse (on the upside I should move into one of the few properties in the UK with insulation before winter so...)

Got my gas/electricity bill for last year. I get back 200 EUR because my usage was down. My prepayments for next year go from 10x 135 EUR to 10x 248 EUR, though (it's the gas; my electricity is all renewables).

Interesting - doesn't make a difference here. My electricity is renewables but from what I understand electricity is priced on a unit cost so there's no difference in price for different sources.

That's why the Treasury was apparently mulling the idea of a windfall tax on renewable power companies It makes sense from a purely Treasury civil servant way - renewables have not increased in price, because of the structure of the market/regulation they have earned a "windfall" as they've not faced the same increased costs but charge the same price to consumers. So if there's any sector that should get a windfall tax it's them. But that is, of course, just very "too clever by half" Treasury thinking - luckily I think that idea was ignored by the politicians.

[Syt]

On the plus side, I will get a one time payment for increasing inflation (EUR 250), and a one time payment for increasing energy prices (EUR 250 from the government).

(I'm not eligible for the EUR 120 energy bill voucher, because my salary is too high )

[Tamas]

Why aren't you on a fixed contract Sheilbh?

[Sheilbh]

Why aren't you on a fixed contract Sheilbh?

Combination of reasons but basically my energy company was one of the ones that went bust last winter, so I got moved to Scottish Power. I was thinking of fixing this spring - but at around the same time was looking at buying a flat and planning to move this year. That should (touch wood) happen in the next 3-4 months, which is good. But I didn't want to be locked into a fixed contract when I knew I'd be moving.

Possibly, in retrospect, the wrong choice.

Although maybe not because where I'll be moving to has building utilities for heating and hot water so I don't have any choice on provider, it's part of the lease (and I think the intention is to join the district heating scheme once that's complete) - so I'm not sure I'd even be able to transfer my contract and might, instead, have been hit with a big bill for breaking it early.

[Tamas]

Fair enough, but as I recall, moving your contract to a new address is fairly straightforward and the penalty fees for early exit aren't horrendous either (could remember wrong though!).

[Richard Hakluyt]

Why aren't you on a fixed contract Sheilbh?

Timing is important here. Our last fixed contract ended after the shit had hit the fan so we are now stuck with variable rates. Luckily for my elderly mother-in-law, her contract came up for renewal a couple of months earlier and we got her a 3-year fixed contract at very reasonable rates.

[Tamas]

Why aren't you on a fixed contract Sheilbh?

Timing is important here. Our last fixed contract ended after the shit had hit the fan so we are now stuck with variable rates. Luckily for my elderly mother-in-law, her contract came up for renewal a couple of months earlier and we got her a 3-year fixed contract at very reasonable rates.

True. I remember my September renewal was weird because for probably the first time since I lived here, changing contracts didn't mean getting a better deal. EDF was the best but still above what we paid previously. Little did I know then how bad it would become.