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UK economy on verge of stagflation as it phases out Russian energy imports

UK economy on verge of stagflation as it phases out Russian energy imports
Dino Kurbegovic

The UK economy has been hit pretty hard by the devastating effects of inflation, rising energy, and food prices, decreasing household purchasing power, and diminishing savings rate with difficult-to-come-by credit.

With UK’s plans to free itself from the reliance on Russian energy imports, fuel prices have jumped by 43.7% from January to July 2022; and according to GlobalData, a leading data, and analytics company, if the gross domestic product (GDP) rate doesn’t keep up with these increases, the UK economy will enter into stagflation. 

Bindi Patel, Economic Research Analyst at GlobalData, sees the purchasing power of consumers eroding even further, which could lead investors to think twice before making investments. 

“With soaring inflation levels, the purchasing power of the end consumer will continue to erode. Investments are expected to be subdued as investors may delay their plan to invest due to the rise in borrowing costs. Against the backdrop, GlobalData has revised its inflation rate projections of the UK for 2022 upward from 5.5% in February 2022 to 9% in August 2022.”

GDP forecasts vs. inflation forecasts in the UK. Source: GlobalData

Raging inflation

According to the National Statistics Office of the UK, the inflation rate jumped to 10.1% in July 2022, compared to 9.4% in June of the same year, making it the highest rate recorded since 1982. Housing and utility inflation led the pack in terms of inflationary increase, which stood at 20%, followed by food and non-alcoholic beverages with a 12.7% increase. 

Similar to the US Federal Reserve, the Bank of England (BOE) hiked rates in an attempt to fight of inflation, with a 50 basis points (bps) rate hike in August 2022, the highest in 27 years.

Meanwhile, GlobalData forecasts the UK economy to slow down to 3.3% from the projected 5.7% growth; while projecting the UK to enter stagflation in 2023 when GDP will be flat but inflation will remain at 6.4%. 

While inflation remains the key risk for economies, it is prudent to expect more tightening cycles from central banks across the world. This lack of liquidity could bring about stagflation in certain countries which have been harder hit by rising living costs, and according to experts, the UK is one of them, currently on the brink of possible stagflation. 

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