Friday, 25 April 2008

Stagflation - we are getting there

First quarter GDP data is just out, and the the UK economy is definitely winding down. On an annualized basis, the economy grew by around 1.6 percent, which is the slowest rate in about 3 years.

Where is the drag coming from - the financial services sector, which are now rapidly slowing. The days of 5 percent growth are over the banks and building societies. No housing bubble means now growth.

While the economy is definitely on the slide, it is doubtful whether the slowdown is sufficient to put much downward pressure on inflation. The labour market remains tight, sterling has depreciated, and key commodity prices, such as food and fuel, are exploding. With strong inflationary pressures piling up, it is no time to be thinking of interest rate cuts.

It is all adding up to seventies-like revival of stagflation.

7 comments:

Ray said...

The good times are over, hard times are on the way. It feels like 1980 all over again.

Dave Birt said...

The oil problems in scotland will complicate growth - no oil, no economy.

aSteve said...

Biflation - not stagflation. :P

http://en.wikipedia.org/wiki/Biflation

I guess that, with GDP growth at below CPI, our economy is (in real terms) in recession right now... and, judging by the rate of the slowdown, we may see a recession in nominal terms by the end of the year.

I wonder how much longer the labour market will remain tight. Danny Blanchflower commented at his surprise that the employment figures were holding up so well at the last Treasury Select Committee meeting. The news seems filled with stories of mass redundancies - 1300 from my profession announced by a company with offices near me this week alone. I wonder, can we trust the accuracy of the employment figures as an accurate, up-to-date and relevant metric?

MT said...

asteve,

On the employment figures - the labour market is a lagging indicator. Firms first hoard, and when things get tight,they offload excess labour quickly.

Just wait,a shake out is coming, esp. in financial services.

Anonymous said...

asteve,

Wait till all the economic migrants go home because they are fired first and only came here for work.

We'll just be left with the terrorist migrants and their welfare bill. Great.

Overall, good for a rental crash.

Nick

Anonymous said...

I went on a stagflation weekend once in Amsterdam. I ended up in a ditch my with trousers on back to front.

andyrich29 said...

Just a thought, but how will cutting interest rates here affect the global rise of food prices? Do interest rates really have that much effect on essentials such as food??