1. Money

    Fraser Nelson

    Is stagflation coming for the UK?

    Is stagflation coming for the UK?
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    This week, a US economy that had been expected to grow in the first quarter of the year was recorded as having shrunk 0.4 per cent – a stunning fall, raising awkward questions about what might come next. This morning, it emerged that the Eurozone grew by just 0.2 per cent over the same period, with inflation in both the US and Europe topping seven per cent.

    For weeks now, investors in America have been spooked by the ‘inverted yield curve’: a technical term, but one which carries certain implications. When this happens (i.e., short-term government bonds become more valuable than long-term ones) recession often follows. Every US recession for the past 50 years has done so after the yield curve inverts.

    America is ahead of Britain when it comes to the global economic slowdown. Discussion in Britain still focuses around the words ‘cost of living crisis’, but it is perhaps only a matter of time before these are pushed aside by the word ‘stagflation’: when growth stagnates, inflation soars and unemployment rises too. We’ll know more on 12 May, when economic growth figures are released for March. So far this year we have had 0.8 per cent growth in January and 0.1 per cent growth in February. These are particularly bad figures when you consider that this is supposed to be Britain’s economic bounceback from the Covid years.

    Last week’s Treasury sample of independent forecasts shows UK growth of 4.1 per cent is expected this year and 1.5 per cent next year. (CPI inflation is expected to be 7.2 per cent and RPI 9.1 per cent.) So not many analysts expect recession this year. Joe Biden blamed the Q1 dip in American growth on ‘technical factors’, saying the economy ‘continues to be resilient in the face of historic challenges’. Then again, this time last year inflation spikes were dismissed as ‘transient’.