The UK is preparing for a long period of stagflation

The risk of a prolonged period of stagflation in the UK has increased after consumer prices rose more than expected as economic growth slowed.

Recent official and informal economic data fell short of analysts’ expectations, prompting many to warn of stagflation and even economic contraction in the second quarter of this year.

It comes as some experts say the government has not done enough to help households cope with the cost of living crisis stemming from soaring consumer price inflation. Opposition parties in parliament have also accused Chancellor Rishi Sunak of providing inadequate support to Britons struggling with rising energy and food bills.

Stagflation, which refers to slow growth in gross domestic product coupled with high inflation, is a relatively rare economic condition that puts great pressure on consumers and businesses.

Line graph of the annual % change in the consumer price index showing that UK inflation has jumped over the past year

Official data last week showed consumer prices rose at an annual rate of 7% in March, the fastest pace since 1992. In contrast, gross domestic product growth slowed to just 0, 1 percent in February, and real wages, adjusted for inflation, contracted 1 percent.

The figures “highlight the risk of a stagflation-like episode for the UK economy,” said Paul Hollingsworth, an economist at consultancy BNP Paribas Markets 360.

Ed Monk, managing partner at investment management firm Fidelity International, said: “The specter of stagflation lurks in the UK economy.”

Last month, the Office for Budget Responsibility, Britain’s budget watchdog, predicted that this year would mark the biggest squeeze in real household incomes since records began in the 1950s.

Informal near real-time data shows how consumers are tightening their belts in the face of the cost of living crisis.

Travel to retail and entertainment venues in the UK, tracked by Google Mobility Data, has been flat since mid-February. In mid-April, consumer confidence was down from a month ago, according to daily figures produced by Morning Consult.

In the first week of April, spending on credit and debit cards for so-called deferred goods, such as clothing and furnishings, was still more than 10% below levels seen before the coronavirus pandemic. , according to data from the Bank of England. This despite the fact that it is not adjusted for inflation.

Line graph of the % change from the average of January 3 and February 6, 7-day moving average showing that visits to retail and entertainment venues in the UK have stagnated

Most economists expect inflation to top 8% in the second quarter, following April’s increase in the household energy price cap set by the industry regulator, and that it may increase when the cap is revised again in October.

James Smith, an economist at ING, predicts the economy will contract by 0.2% to 0.3% in the second quarter due to the compression of household incomes and lower production in the health sector in due to the reduction in Covid-19 vaccinations.

Samuel Tombs, an economist at Pantheon Macroeconomics, predicts a slightly larger contraction and expects the economy to end the year to be just 0.5% stronger than in February.

“With the economy already close to stagnation, it wouldn’t take much to produce a month or two of falling output as pressure on real household incomes intensifies,” said economist Ruth Gregory. at Capital Economics.

Thomas Pugh, an economist at consultancy RSM UK, raised the possibility of the economy falling into recession – defined as two consecutive quarters of contraction.

“With growth forecast to average just 0.1% in each of the last three quarters of this year, it wouldn’t take much of a rise in oil prices or disruption to supply chains to push the UK in the recession,” he said.

It could mean a lot more pain for consumers. Joanna Elson, chief executive of the charity Money Advice Trust, said one in eight UK adults said they had gone without heat, water or electricity in the past three months.

At the end of March, around nine in 10 adults said their cost of living had risen, according to data from an ONS survey, with around half cutting non-essential spending or reducing energy use at home.

Falling real wages could make the average British household worse off by around £900 this year, according to calculations by Jake Finney, an economist at consultancy PwC. The lowest earners could see their earnings drop to as low as £1,300.

Column chart of average weekly regular real earnings, annual % change showing UK real earnings falling as inflation rises

The savings accumulated during the pandemic should help limit the blow, but this is concentrated on the wealthiest households, “and the government intervention to support households with little or no savings has been relatively limited so far. “said Sandra Horsfield, economist at Investec.

The “currently strong” labor market could help soften the economic downturn, said Silvia Dall’Angelo, an economist at investment management firm Federated Hermes.

However, she added that job growth was already slowing and although Sunak has announced modest fiscal easing in recent months, “the fiscal stance for this year is overall tight.”

Many businesses are also struggling with rising costs and falling demand for their goods and services. Prices for business inputs rose at an annual rate of 19% in March, according to ONS data, in the biggest monthly increase since records began 20 years ago.

Line graph of prices of goods bought and sold by manufacturers, index, 2015=100 showing UK input and output producer price inflation rising rapidly

Martin McTague, national chairman of the Federation of Small Businesses, a lobby group, said the faster pace of growth in input prices relative to consumer price inflation shows “how small business owners directly suffer the blow – in many cases, reducing their take-home pay or reducing investment and expansion rather than passing the higher costs onto customers”.

More than four in five managers believe the government has not gone far enough to help UK businesses cope with rising costs, according to research by the Chartered Management Institute, a trade body.

Anthony Painter, director of policy and external affairs at CMI, said companies were under pressure as “they face a potential drop in consumer confidence, higher prices for materials, supply chain and higher production costs”.

Sarah Seymour, owner of Love Absolute Skincare, a London-based beauty company, said her sales were hit by people with “less money in their pockets”.

“Sometimes no money came in,” she added. “The battle to survive for micro businesses like mine is real.”

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