NEWS “UK Economy on a Knife Edge: Can Growth Triumph Over Stagflation?” Rob Morgan, Chief Investment Analyst at Charles Stanley UK economy struggles into the year end The UK has been experiencing an unenviable mix of persistent inflation and economic stagnation – or ‘stagflation’. While this week’s inflation data shows a modest reprieve that helped calm nervous bond markets it was more of the same on the growth front. The UK economy expanded by 0.1% in November, effectively recouping October’s 0.1% decline. With the Christmas period still to feature in the numbers the final quarter of 2024 was probably just about positive, which is sorely needed following the zerogrowth recorded in the third quarter. It’s not a great picture overall, though, and we might expect further constraint to growth in the coming months as some businesses choose to retrench in response to the increases to National Insurance announced in the Budget. Can the UK avoid stagnation? Businesses are enduring a pincer movement of constrictive interest rates and higher costs. Meanwhile, consumers are also feeling the pinch as they continue to battle higher cost of living and borrowing costs compared to pre-Covid levels. It’s not all doom and gloom. A significant ray of hope for the UK economy comes from the Bank of England gradually reducing interest rates. Plus, many households are now feeling the glow of wage growth trending above price rises. Although pared back by tax rises, this is restoring some spending power lost in the post-Covid inflation surge. Yet there is a risk that inflation remains on the high side, limiting the scope for interest rate cuts that would help restore business confidence and stimulate economic activity. Major retailers have warned that food prices may resume an upward trajectory, and a recent increase in the previously subdued oil price could herald a further inflationary pulse on top of the expected inflationary impact of Donald Trump’s reprise as US President. Inflationary trends could stay the hand of the Bank of England in terms of cutting interest rates and keep the handbrake on economic activity. Combined with the additional costs employers are taking on following measures unveiled in the Budget, the coming months could be an uphill struggle. The UK economy is therefore on a knife edge. To aim for a better outcome the government needs to engender a more growth-led narrative and provide incentives for business expansion to ultimately increase the overall tax take without upping already-high tax rates.
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