It’s been about four decades since the last chronic bout of stagflation, so a comment earlier this week from economist Paul Dales probably didn’t strike the degree of dread it should have among those too young to recall or appreciate the fiscal debacle that gripped the UK for much of the 1970s.
Responding to Bank of England Governor Andrew Bailey’s observation that the recovery from the pandemic is levelling off, Mr Dales of Capital Economics noted a “whiff of stagflation in the air”, referring to the crippling double-whammy of excessive inflation accompanied by very low or even negative economic growth.
With highly-publicised shortages of goods and staff caused by Brexit and the pandemic, the ingredients are there for a sharp rise in inflation, which makes the reading of yesterday’s figures on the UK economy even more concerning. In a nutshell, economic activity slumped in July despite the lifting of the last of Covid restrictions in England, with growth falling to a mere 0.1 percentage point from June’s 1% clip.
Stagflation is a true economic conundrum because the solutions to combat inflation would be expected to hamper growth, while boosting growth tends to be deeply inflationary. Only one of the two issues can be addressed, and either way, a significant segment of the population will suffer.
As business editor Ian McConnell noted in his Called to Account column earlier this week, one obvious move that would ease the labour shortages fuelling wage inflation would be to reverse the clampdown on immigration from EU countries. However, the Prime Minister’s administration is showing no inclination to do so.
“The only drawback of such a crucial and eminently sensible move would be a specific political one for the Conservative Government, given that for many of the Brexit supporters who enabled Boris Johnson to sweep to victory in December 2019, leaving the EU was all about bearing down on immigration.
“This is demoralising reality. However, it is a problem only for the Conservative Government and not for the country, which will only be damaged further by a continuing refusal to reverse the foolish post-Brexit immigration stance.”
Staying on the theme of shortages, deputy business editor Scott Wright reported on the latest set of results from Parsley Box, the Scottish ready-meal company that said it will have to lift prices on “selected” product lines because supply chain challenges are driving up its costs.
The AIM-listed firm, which targets the Baby Boomer market, racked up pre-tax losses of £5.4 million during the six months to the end of June, up from a loss of £1m in the same period a year earlier. Asked about supply chain problems, chief executive Kevin Dorren said these issues were affecting all companies in the sector.
“I do think, arguably, that it is here to stay for quite a period of time, and we all – consumer and businesses – just need to get used to not always walking into a shop and seeing what we saw before, which was full shelves.”
With a widespread shortage of HGV drivers, one might imagine that those on the road are doing a tidy business, but not so for all.
Mazars reported on Thursday that haulage firm insolvencies hit a 17-month high in June as the loss of cross-border trade and the lack of drivers took their toll on the industry. According to the accountancy firm’s figures, 31 UK haulage firms went bust in June, the highest in a single month since January 2019.