Stagflation has two elements to it: weak growth and rapidly rising prices. Britain already has the inflation; it is now getting the stagnation.
To be sure, the main reason behind the 0.3% fall in gross domestic product in April was the scaling back in NHS Covid 19 testing and vaccinations, which alone shaved 0.5 percentage points off growth.
Yet even taking into account reduced health output the economy would still have expanded only by 0.1% in April after a 0.1% decline in March. That’s stagnation by any measure.
What’s more, all the main components of GDP – services, production and construction – contracted in April, the first time they have all negatively contributed to monthly GDP since the country was in lockdown in January 2021.
The Office for National Statistics said some of the 1% drop in manufacturing output could be attributed to higher fuel prices, while the 0.4% fall in construction output followed an increase in repair work in March caused by February’s storm Eunice.
April brought an increase in national insurance contributions and although there was no immediate sign of consumers cutting back on spending in the shops or eating out, Samuel Tombs at Pantheon Macro says most workers won’t have received their smaller pay packets until the end of the month. May’s growth figures will reflect the tax hike and the impact of rising petrol prices, he predicts.
In its May monetary policy report the Bank of England said it expected the economy to expand by 0.1% in the second quarter of 2022. Even this modest forecast now looks a stretch, since it would take growth of 0.4-0.5% in May and June to be achieved. On past form, the extra day’s holiday to mark the Queen’s platinum jubilee will alone reduce growth in the second quarter by 0.4 percentage points.
It now looks odds on that the economy will contract in the second quarter, and despite the £15bn of extra support provided by Rishi Sunak last month, the chances of a recession – two successive quarters of negative growth – have increased.
Even so, the inflationary part of the stagflation scenario means the Bank of England will still raise interest rates for a fifth time in a row later this week. The weakness of GDP makes it more likely it will opt for a 0.25-point increase rather than the more aggressive 0.5-point jump some in the City had been expecting.
