Perfect storm could scupper economic recovery
IT has been some time that I have talked about the big beast stalking the long grass of the UK economy.
But we can all now see that inflation has pounced not just in the UK but also in the global economy as it ravages all of the 38 countries in the OECD (Organisation for Co-operation and Development) to a greater or lesser extent.
Being in the midst of inflationary pressures, the question people are all asking is when will it end?
But to answer this we need to know what has led to the current situation.
In one word: Covid.
This has played a large part as it has caused the “workshop of the world” (a phrase originally coined for the UK economy at the start of the Industrial Revolution) China to effectively shut-up shop to prevent Covid outbreaks.
This is still the case in large parts of China, making the distribution of goods very erratic. At the same time as furlough fuelled the Western world’s demand for consumable sourcing became an issue given in China’s zero policy on Covid.
Then there has been quantitative
easing (QE) which the UK, the EU and the US have all adopted due to the pandemic by in effect printing money in the form of government bonds with a view to stimulating economic recovery.
Just to put this in focus, it is estimated that the UK has spent 375 billion pounds, which is equivalent to 20% of the UK’s GDP with QE.
The combination of these two factors has meant there is more money chasing fewer goods, which inevitably leads to higher prices and now there is an ongoing war in Ukraine which is causing disruption
to the global markets, not just wheat and grain but also things like neon and palladium as well as for oil and gas. All of which, again, leads to less supply to meet current demands, so prices have to go up.
So, we can all see what the causes are and we can all feel the effect even if it is just putting petrol in a car.
We have to give some thought to the fact that if there are any other factors that come into play to derail growth, we could then be in recession for longer than anticipated, which is reinforced by the
shrinkage of the UK economy by 0.3%.
This is, however, not reflected in unemployment as we still have full employment.
But if we do get wage inflation without increasing productivity, it will be a foregone conclusion that the recession will ravage much more of the UK economy than anticipated.