Economy Latest: Stagnation Nation

Economic Times Editor: Just as I predicted in the first quarter of this year and then just about each month thereafter – the UK economy is to enter a perfect storm of rising inflation that it is largely not in control of, causing a cost of living crisis, recession (during Q3) and then stagflation (in 2023). The first two of the four components is now a matter of fact. The third has just about arrived. Economic stagnation is with us.

Technically, the UK economy is not in recession – if you believe most of the media reports. The reality is that the slide is in place and that is exactly where the economy is heading.

The UK economy officially stagnated in the three months to July, just as the cost of living crisis started to tighten its grip on household finances and business activity more widely. UK output is now flatlining according to data from the Office for National Statistics released on Monday. Many economists and analysts has optimistically expected economnic expansion of just 0.1 per cent. The growth rate has deflated like a punctured front tyre and the car has lost momentum since the start of the year as inflationary pressures hit businesses and consumers alike. As reported by just about all the media – inflation has now soared to a 40-year high.

The freeze in average annual household energy bills at £2,500 over the next two years, announced last week by Liz Truss, the new prime minister, may slow inflation a little, simply by the nature of forcibly holding prices down. But it won’t stop public and business sentiment tightening belts in preparation for a recession. It won’t stop overall inflation. For intance, imported goods are affected by inflation in all sorts of areas – not least manufacturing and shipping.

The FT reports that – “A recession over the coming quarters no longer looks likely, following the new PM’s energy price announcement,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The idea that a recession is to be averted simply because heating costs have been stopped from increasing (from double its original price) is fanciful.

Manufacturing productiviry fell in July by 0.3 per cnet – adding to the 0.9 per cent fall the month before. The construction industry has seen a very sharp and sudden contraction as the housing market comes under pressure from rising interest rates and poor sentiment for the immediate future in terms of property price inflation.

Let’s not forget, it was only four months ago that the International Monetary Fund (IMF) had forecasted that British economic growth will slow sharply to the weakest of any major economy next year. The Bank of England supported this view just last month by saying that the economy is forecast to shrink in the last three months of this year and keep shrinking until the end of 2023. The BoE is notorious for being overly optimistic in its predictions.

Economic stagnation will then be followed by some sort of stagflation – the nightmares of any government.