‘Whiff of stagflation’ hangs over economy
The world is facing a dangerous bout of ‘stagflation’ as the economic recovery slows and prices rise, experts have warned.
In a gloomy report entitled Now For The hard Part, Capital economics said data from the US to China suggests that the rapid rebound from the pandemic is beginning to tail off. at the same time, prices on global commodity markets are rising alongside the cost of everything from used cars to food in restaurants.
Neil Shearing, chief economist at Capital economics, warned that this ‘whiff of stagflation’ – where economic growth is weak but inflation soars – ‘has created something of a headache for central bankers’.
Stagflation is considered a dangerous prospect because subdued economic growth hits jobs and wages at a time of rising prices, putting a squeeze on family budgets.
Shearing said: ‘It’s now clear that recoveries in the US, UK, eurozone and China have lost steam in recent months. a slowdown in growth was to some extent inevitable given that impressive rebounds in the first half of the year had left most economies either at or close to their pre-virus levels of output.
‘The low-hanging fruit of this recovery has now been picked.’
The slowdown poses a problem for central bankers, who are facing the dilemma of whether to withdraw economic support to tame inflation while running the risk of stunting the recovery.
The Bank of england, for example, slashed interest rates to a record low of 0.1pc last year to encourage spending, and restarted its money-printing programme to inject more cash into the economy. But policymakers are now divided on whether to cut short this £895bn quantitative easing programme, and have hinted they could hike interest rates as early as next year.
The trouble caused by Covid can be seen in sectors such as car manufacturing, where a shortage of high-tech chips used in vehicles’ electronic systems is causing chaos. Production lines at the chip companies – many of which are in asia – ground to a halt amid lockdowns last year, and have been struggling to keep up with a surge in demand as people started buying more cars in recent months.
other industries are also suffering. Worries that there will be a shortage of workers to kill, pluck and prepare turkeys around Christmas has led to poultry farms rearing fewer birds, according to the British Poultry Council. and a lack of lorry drivers has caused problems for businesses.
The rapid spread of the Delta variant of Covid, meanwhile, has put more hurdles in the way of recovery. While all of these pressures are squeezing economic output, they are also pumping up inflation.
Shortages of supplies mean businesses and consumers are paying more to get hold of them – while a lack of workers, due to both the pandemic and Brexit, is causing businesses to boost the salaries of new starters.
‘Most of the increase in inflation can still be attributed to effects of the pandemic that are likely to be temporary,’ Shearing said.
But his colleague Jack allenreynolds, senior europe economist, added: ‘The full impact of supply problems has probably not yet fed through to consumer prices. and we expect the disruption to continue into 2022.
‘The unprecedented acceleration of shipping costs, and the unusual conditions of the pandemic, make it particularly difficult to predict how much consumer prices will rise. Based on historical experience, the impact could be significant.’