The UK plans to completely halt oil imports from Russia by the end of this year, leading to a 43.7% increase in fuel prices from January to July 2022. If prices continue to rise without a sharp increase in GDP growth rate, there is a high risk that the UK economy is on the brink of stagflation, observes GlobalData, a leading data and analytics firm.
The UK economy is witnessing stagflation
Bindi Patel, Economic Research Analyst at GlobalData, comments: “As inflation rates rise, the purchasing power of end consumers will continue to decline. Investment is expected to be cautious as investors may postpone their investment plans due to the rise in borrowing costs. Against this background, GlobalData has revised its inflation forecast for the UK for 2022 upwards from 5.5% in February 2022 to 9% in August 2022.”
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According to the Office for National Statistics, the inflation rate in the UK rose from 9.4% in June 2022 to 10.1% in July 2022, the highest rate recorded since February 1982. Rising food and energy prices were the main contributors to high inflation in July 2022. Housing and utilities saw prices rise about 20%, followed by food and non-alcoholic beverages, where prices rose 12.7%, the highest monthly increase since May 2001 .
In terms of economic activity, the UK’s real GDP contracted by 0.1% on a quarterly basis in the second quarter of 2022 as the country’s cost of living crisis continued to deepen. The decrease in the second quarter of 2022 was mainly due to a decrease in service performance. In addition, real consumption by private households fell by 0.2%, triggered by a sharp rise in the prices of goods and services.
The Bank of England has already implemented six interest rate hikes from January to August 2022 in an attempt to bring down the elevated level of inflation. In August 2022, the Bank of England raised its interest rate by 50 basis points (bps), the highest in 27 years, and raised borrowing costs to 1.75%.
Rising prices, high borrowing costs and difficult external conditions will weigh on UK economic activity. GlobalData forecasts that the country’s economic growth will slow to 3.3% in 2022 from 5.7% in 2021. In 2023, GlobalData expects the UK economy to experience stagflation, with real GDP expected to remain flat and inflation to remain at an elevated level of 6.4%.
From a purely macro perspective, public spending will need to pull the cart before the spring 2024 general election as private consumption comes under pressure, business investment is constrained by deteriorating earnings prospects and exports are constrained by slowing global growth. It is therefore unlikely that 2023 will be a year of fiscal restraint.
Patel concludes: “Monetary tightening remains the order of the day as inflation remains the key risk factor to macroeconomic stability. The government needs to focus on various structural reforms to stimulate growth in the medium term.”
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