PoundSterlingLIVE – Image © Adobe (NASDAQ:) Images
The UK economy is entering a ‘stagflation-lite’ episode, according to some economists.
Julian Jessop, an Economics Fellow at the Institute of Economic Affairs, says the UK should experience a mild bout of stagflation, or ‘stagflation-lite’.
The call comes after the UK reported that inflation rose to 2.6% in November, adding to recent ONS data showing that the economy shrank for a second consecutive month (-0.1%).
Stagflation describes high inflation and low economic growth, which is widely considered a negative for the domestic currency and stock market. UK inflation is tipped to trend over the coming months towards 3.0% by economists at the Bank of England.
“The UK, Canada, India, Brazil, so many others, are finding themselves in a situation where inflation is done moderating, but growth is low, and they are keen to keep spending to support growth which puts pressure on the currency and therefore inflation and the central bank,” says W. Brad Bechtel, Global Head of FX, Jefferies.
PMI data for December meanwhile showed that the UK economy’s private sector is shedding jobs at the fastest pace in almost four years. Also, average prices charged by private sector firms increased at the steepest pace in nine years, notes Viraj Patel, a strategist at Vanda Research.
“Looks very stagflationary,” he says.
The term stagflation combines the words ‘stagnant’ and ‘inflation’, and some economists say high unemployment is an additional requisite, as per Patel’s nod to the PMI’s signal on the labour market.
But at this point in time, the official data suggests the UK labour market remains in decent shape, and most economists we follow don’t see a massive deterioration in the job market, even in the face of the government’s recent job tax increase.
“This is not stagflation,” says Kristina Hooper, Chief Global Market Strategist at Invesco.
Because of this, the term ‘stagflation lite’ is perhaps more apt.
“There is a danger of overdoing the gloom. Most households should still see their real incomes rise. The increases in public spending will also offset at least some of the weakness in the private sector. Broad money is now growing at a decent pace,” says Jessop.
Nonetheless, he says the November inflation data surely kills off any chance of a rate cut this week.
“And combined with stalling economic growth and the early signs of a slump in the labour market, talk of ‘stagflation’ could dampen confidence further,” he adds.
Jessop says there should only be a mild bout of stagflation before inflation falls back and the economy picks up again over the course of 2025.
“Compared to past episodes, any declines in output and increases in inflation and unemployment should be relatively small.”
The IEA says the government must now fulfil its promise to ‘kick start’ economic growth, as the promise looks hollow, and the chances of a much worse outcome are increasing.
“In particular, the Bank will have to do a good job tomorrow in reassuring people that interest rates can still be cut gradually next year, even with inflation now heading in the wrong direction,” says Jessop.
An original version of this article can be viewed at Pound Sterling Live
