Stagflation threatens in UK as economic growth stalls

Britain’s economic recovery stalled in February and March as inflation hit a 30-year high in the worst combination of soaring prices and zero growth since the 1970s.

The looming prospect of stagflation is at odds with Prime Minister Boris Johnson’s claims of a strong economic rebound from the pandemic in the latest figures.

Gross domestic product fell 0.1% between February and March, data from the Office for National Statistics showed on Thursday, below the unchanged forecast of economists polled by Reuters.

It follows zero growth the previous month, a downward revision from an initial reading of 0.1% expansion.

It comes as consumer prices rose at an annual rate of 7% in March, the fastest increase since 1992, according to data released last month.

James Smith, research director at the Resolution Foundation think tank, said: “The economy already appears to be losing momentum as the cost of living crisis intensifies and the risk of stagflation looms.”

For the first quarter as a whole, the UK economy grew by 0.8% over the previous three months, boosted by stronger growth in January. However, that was below analysts’ expectations of 1% and down from the 1.3% increase in the previous quarter.

Paul Dales, chief UK economist at consultancy Capital Economics, said some of March’s weakness in consumer-facing services, such as retail sales and the hospitality sector, could be due to the cost of living crisis forcing households to reduce non-essential spending. elements. “It is particularly worrying when our forecast implies that soaring inflation will reduce real household incomes the most over the next six months,” he added.

Chancellor Rishi Sunak boasted that quarterly growth in the UK was faster than in the US, Germany and Italy.

However, the difference largely reflects the timing of the Omicron coronavirus infections and the fact that UK households were temporarily shielded from soaring energy prices in the first quarter by Ofgem’s default price cap, which does not only resets in April and October. By contrast, consumers in most other countries were hit almost instantly by the price hike.

Even with these differences, the UK economy was 0.7% above its level in the last quarter of 2019 before the pandemic, which was only slightly stronger than the eurozone’s 0.4% but in below France and the United States.

Line graph of the rebased GDP index (Q4 2019=100) showing that the UK's economic recovery from the pandemic is comparable to that of the eurozone

Speaking at the start of a cabinet meeting in Stoke-on-Trent, Johnson said the economic data was encouraging.

“The most extraordinary thing about the country’s recovery from the pandemic has been the strength of the employment situation. . . this is the most important thing we need to focus on: a strong job-driven recovery,” he said. “I’m encouraged by some of the growth numbers I just saw this morning. . . jobs, jobs, jobs is the answer.

Speaking earlier on LBC, the Prime Minister said growth “will come back very strongly in the next two years”.

This contrasts with warnings from many economists about the growing risks of a recession, defined as two quarters of economic contraction.

The Bank of England warned of a recession last week as inflation is expected to hit a 40-year high of around 10% in the fall, on the back of steadily rising costs of energy. The central bank expects the economy to alternate between near-stagnation and contraction over the next two years, with output barely changing in the first quarter of 2024.

“It is clear that the UK faces a serious struggle to avoid recession this year,” said Ed Monk, managing partner at investment management firm Fidelity International.

Samuel Tombs, an economist at consultancy Pantheon Macroeconomics, said he expected GDP to contract 0.4% in the second quarter as healthcare spending fell and consumers tightened their belts.

The pound, an indicator of the UK’s relative macroeconomic performance, fell 0.4% on Thursday morning and continues to trade near pandemic-era lows against the dollar.

Despite the weak economic outlook, markets expect the BoE to raise its main interest rate from the current 1% to 2% by the end of the year.

ONS data showed the UK’s trade deficit for goods and services widened to a record 5.3% of nominal GDP in the first quarter – the biggest gap since records began in 1955 – while imports rose 9.3%, largely reflecting rising energy prices, while exports fell 4.9%. The drop in exports was broad-based, with contractions in machinery, cars and fuel, as well as financial and business services.

The war in Ukraine also led to a nearly 70% drop in UK goods trade with Russia in March.

Business investment fell 0.5% in the first quarter and was 9.1% lower than its pre-pandemic level, as well as 8% lower than in the first quarter of 2016 before the referendum on the Brexit, reflecting high business uncertainty. This is despite the government’s super-deduction policy, a two-year investment tax relief that has been in place since April 2021.

Investment is important for productivity growth, which ultimately drives wage growth and living standards.

Sandra Horsfield, Economist at Investec, said: “Increasing productivity through greater investment will be a crucial ingredient in containing cost pressures for businesses in light of rising wage bills. So another shortcoming in this regard is a worrying signal.

A 15.1% drop in car sales contributed to the drop in production in March. However, activity fell by 0.2% in the services sector as a whole and production fell at the same rate in the manufacturing sector.

The GDP contraction in March would have been steeper had it not been for an unusually strong 1.7% growth in construction, which the ONS attributed to repair work after the February storms.

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