Tuesday 26 January 2010

Stagflation and the UK Q4 GDP Numbers

Firstly, some quotes to think about:
1. "Now in Britain, we are saying, as you know, that inflation is low, interest rates are low and we expect there to be growth.” – Gordon Brown, 2008
2. "We have a strong economy, its momentum will carry us through." – Alistair Darling, 2007
3. "I think the choice is becoming pretty clear. Between a government that is determined at all times to maintain the stability and growth of the British economy. “ – Gordon Brown,2007
4. “...a weak currency arises from a weak economy which in turn is the result of a weak Government.” – Gordon Brown, 1992

So the UK today emerged from recession. What an excellent [sic] job the current government and the Bank of England has done managing the UK economy over the business cycle. Today we find that the UK economy (GDP) has grown by 0.1% in the final three months of 2009. To get these outstanding [sic] results they’ve only had to lower VAT to 15%, lower the Official Bank Rate to 0.5% (the lowest rate in the history of the Bank of England), quantitative ease to the tune of £200 billion and introduce a car scrappage scheme to name but four.

This has all resulted in:
- house prices that are within 13% of record peaks. Of course that’s great news if you’re a “hard working family”, sorry, hard working politician with multiple houses partly paid for by the tax payer.
- a heavily devalued (weak) pound.
- low returns from bank deposits / bonds for those people trying to live on savings or save for retirement.

To go with this we have the Consumer Price Index (CPI) increasing at a rate of 2.9% including the largest month on month in history and a Retail Prices Index (RPI) increasing at a rate of 2.4%.

Now I’m going to get my crystal ball out and predict how the Bank of England is going to respond. I’m betting that they will leave the Official Bank Rate on hold at 0.5%. This in turn will lead to the next big issue for UK PLC. Firstly inflation will take off, then salary inflation will start as the public sector unions negotiate first just before the election and then others join the band wagon. This will then lead to built in inflation which the Bank of England will struggle to get back in hand.

I have one word for where I think the UK economy is headed – stagflation.

To conclude I’m going to modify the four quotes above a little. “Inflation is not low”, “we do not have a strong economy”, “we do not have stability and growth” however we do have “a weak currency”.

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