Stagflation looms in UK as growth stalls

Britain’s economic recovery stalled in February and March as inflation surged to its highest level in 30 years, 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 claim that the economy will rebound strongly from the pandemic.

Gross domestic product fell 0.1% in the February-March period, data from the National Bureau of Statistics showed on Thursday, less than forecasts of economists polled by Reuters.

Growth in the previous month was zero, a downward revision from an initial gain of 0.1%.

This is because the consumer price Rose The annual growth rate in March was 7 percent, the fastest pace since 1992, according to data released last month.

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

Throughout the first quarter, the UK economy expanded by 0.8% from the previous three months, driven by strong growth in January. However, that was below analysts’ expectations of 1% and also below the 1.3% increase in the previous quarter.

Paul Dales, chief U.K. economist at consultancy Capital Economics, said some of the weakness in consumer-facing services such as retail and hospitality in March may have been as the cost of living crisis forced households to cut spending on non-essential items. project. “This is especially ominous when our forecasts imply a spike in inflation will minimize households’ real income over the next six months,” he added.

UK Chancellor of the Exchequer Rishi Sunak boasted that the UK’s quarterly growth was faster than the US, Germany and Italy.

However, the difference largely reflects the timing of the Omicron infection and the temporary relief of UK households from the first-quarter surge in energy prices, as Ofgem’s default tariff caps were only reset in April and October. By contrast, consumers in most other countries were hit almost immediately by higher prices.

Even with these differences, the UK economy is still 0.7% above its pre-pandemic level in the final quarter of 2019, just slightly stronger than the euro zone’s 0.4%, but below France and the US.

GDP index line graph (Q4 2019=100) shows UK economy recovering from pandemic on par with Eurozone

Johnson said in a radio interview on Thursday that the measures announced in the Queen’s speech on Tuesday were designed to ensure “we have a strong economic recovery and we can get through this. In fact, if you look at what the forecast for this country is, , that’s exactly what’s going to happen.”

However, this contrasts sharply with warnings by many economists of the growing risk of recession, defined as two quarters of economic contraction.

The Bank of England last week warned of a recession as inflation rises to a 40-year high of about 10% in the autumn as energy costs continue to rise. The central bank predicts the economy will alternate between near stagnation and contraction over the next two years, with output barely changing in the first quarter of 2024.

“It’s clear that the UK faces a serious fight to avoid recession this year,” said Edmundk, associate director at investment management firm Fidelity International.

Samuel Tombs, an economist at consultancy Pantheon Macroeconomics, said he expects GDP to contract 0.4 percent in the second quarter as health care spending falls and consumers tighten their belts.

Sterling, a bellwether of Britain’s relative macroeconomic performance, fell 0.4% on Thursday morning and continued to trade near pandemic lows against the dollar.

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

Britain’s goods and services trade deficit widened to a record 5.3% of nominal GDP in the first quarter – the largest deficit since records began in 1955 – while imports rose 9.3%, mainly reflecting higher energy prices, ONS data showed. Exports fell by 4.9%. Exports fell broadly due to contractions in machinery, cars and fuel, as well as financial and business services.

The Ukraine war also caused Britain’s trade in goods with Russia to drop by almost 70% in March.

Business investment fell 0.5% in the first quarter, 9.1% below pre-pandemic levels and 8% below the first quarter of 2016, before the Brexit referendum, reflecting high levels of business uncertainty. This is despite the government’s implementation of excess deductions, a two-year investment tax cut from April 2021.

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

Investec economist Sandra Horsfield said: “Given rising payrolls, increasing productivity through increased investment will be a key factor in reining in cost pressures for businesses. Therefore, further shortfalls on this front are a worrying sign.”

A 15.1% drop in auto sales was responsible for the decline in production in March. However, activity in the services sector as a whole fell by 0.2%, and output in manufacturing fell at the same rate.

The contraction in GDP in March would have been sharper had it not been for an unusually strong 1.7% growth in the construction sector, which the ONS attributed to maintenance work following February’s storm.

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