There threat of a sustained period of stagflation in Britain has grown after consumer costs surge past forecasts and as economic growth stunts.
Recent economic figures from official as well as informal sources reveal underwhelming economic performance underneath analyst predictions, triggering concerns that stagflation is upon us and even possibilities for an economic recession for this year’s second quarter.
Stagflation Economic Threat
This comes as many say the government has upheld its responsibilities for guiding households through the current cost-of-living crisis occurring as a result of soaring consumer cost inflation. Parliamentary opposition members also point the finger at chancellor Rishi Sunak for failing to adequately support Britons dealing with soaring energy and food costs.
Stagflation, which describes the slowing growth in GDP combined with rising inflation, is a relatively rare economic circumstance that places more pressure on consumers and companies.
Last week, official economic figures revealed that consumer costs were growing annually at 7 per cent in March, the speediest since 1992. Meanwhile, GDP growth slowed to a crawl of just 0.1 per cent in February, while real wages, adjusted for inflation, squeezed by a percent.
These figures illustrate an increased chance for a stagflation situation for the British economy, according to Paul Hollingsworth, an economist at consultancy firm BNP Paribas Markets 360.
Ed Monk, associate director for Fidelity International, an investment management company agreed that stagflation was a “spectre” stalking the British economy.
Biggest Squeeze on UK Households Since the 1950s
In February, the Office for Budget Responsibility, Britain’s financial watchdog, forecasted that 2022 would see the tightest squeeze on household’s real wages since records started in the 1950s.
And more informal data was gathered supporting the picture that consumers are facing a significant squeeze on their belts as the cost of living hardens.
Visits by consumers to Britain’s UK entertainment and retail venues, as measured by Google Mobility Data, have stopped growing since mid-Feb. With consumer confidence dipping in the beginning of April compared to the month previous, according to figures provided by Morning Consult.
And the opening of April saw credit and debit card expenses for “delayable goods,” which includes items like clothing, at still underneath 10 per cent figures pre-coronavirus 1.0, according to figures from Bank of England. This is still the case despite adjustments for inflation.
The majority of economists predict that inflation will climb to beyond 8 per cent in Q2, amid the increase in energy price caps for households in April as imposed by the industry regulator, and potentially beyond this once October revisions happen.
James Smith, an ING economist, predicted that the economy will further contract 0.2 per cent to 0.3 per cent in Q2 as a result of the squeeze on real wages for households and diminishing GDP particularly in the health sector because of the flat lining of Covid-19 vaccinations.
Samuel Tombs, Pantheon Macroeconomics economist, thinks that contractions will be less than this with the British economy seeing a growth of just 0.5 per cent as compared to February.
Meanwhile, Ruth Gregory, a Capital Economics economist believes that because the British economy is already near flatlining, it doesn’t take much extra pressure for consecutive months to experience diminishing output as the pressure on households also becomes more extreme.
Thomas Pugh, RSM UK economist, looks ahead to chances of Britain entering into a recession — described as two consecutive quarters showing contractions.
Thomas says that because predictions for growth are at just 0.1 per cent for the remaining year’s three quarters, even a small increase in oil prices or a supply chain disruption could tip the UK into a recession.
Which could mean even more of a squeeze for Brits. One study shows that ⅛ of UK adults have already reportedly experienced no electricity, water, or heating for the last three months. Gonzalo Lira, a former economist who was captured in Ukraine and feared dead for some time, predicted that many in Europe will freeze to death this winter, when economies reach hyperinflation.
One Office of National Statistics survey revealed that nine out of 10 adults agreed that cost-of-living had increased, with around half of these cutting spending or nonessentials or lessening energy use at home.
Effect on British Wallets
The effect of this drop in real living wages could mean that the average UK household is around £900 worse off for the year, according to Jake Finney, PwC economist. Jake’s calculations supposedly say that lowest income earners could see a loss in earnings as great as £1,300.
Any pandemic savings should be very useful for damage control during this period, however the majority of savers were distributed in wealthier households, Sandra Horsfield said, an Investec economist. There has been little government relief for these households.
One silver lining is that the labour market is currently at a high, says Silvia Dall’Angelo, Federated Hermes economist for the investment management firm.
However, Sylvia notes that the market growth has already begun to shrink and despite announcements by Sunak for fiscal easing, the overall fiscal position is restrictive generally speaking.
Many firms are also having to juggle rising costs, with Amazon adding delivery costs factoring in oil prices. This is compounded by reduced demand for consumer services and goods. Input costs businesses increased by an annual rate of 19% for the month of March, according to ONS figures. This is the highest monthly jump since records started two decades ago.
Martin McTague, of Federation of Small Businesses lobby group, Lisa this combination of reduced real wages with expanding input prices means that business owners are shouldering the recessive hit – in many situations, taking home less income or shrinking expenses and passing on the burden of increased costs to customers.
Four in five managers believe that the British government hasn’t done enough to assist businesses with these increased costs, according to a survey from the Chartered Management Institute.
Anthony Painter, the director of the CMI professional body for external affairs, please let this snowball – a combination of supply chain weaknesses, greater manufacturing costs, reduced consumer willingness to buy, wrapped in one.
In particular, micro-businesses may have the toughest struggle in this environment, due to less market capitalisation to fall back on as a redundancy.