The magnitude of the overall global economic turmoil related to the pandemic and the Russian invasion of Ukraine is the main reason for high inflation and slow growth in most European countries. But in recent days, Bank of England Governor Andrew Bailey has warned that inflation here in the UK will take longer to rise and that economic growth will also be weaker. These bleak forecasts coincided with those of the International Monetary Fund and the Organization for Economic Co-operation and Development, which includes 38 countries.
On Wednesday, Mr Bailey told a forum at the European Central Bank that "the UK economy is likely to weaken earlier and slightly more than other countries."
He said, "I think it's been clear for a few months now." On inflation, he said, as things stand now, he expects the general exchange rate to be more stable as a result of the UK's energy price cap system. This suppressed inflation at the beginning of the year but increased it later.
Retailers also said they expect different results for the UK than for the rest of Europe. Boots owner Stefano Pessina's boss said he suspects the UK is "in a severe recession, probably bigger than other European countries". Last month, Pepco, the owner of Poundland, said in its results that UK customers are cutting even basic purchases. Elsewhere in Europe, where higher wages offset higher prices, this has not happened. Some UK household consumer confidence indicators have bottomed out.
What drives it?
With regard to inflation, Mr Bailey points to the structure of the price cap that influences peak times. But this affects the peak time more than the altitude. The British pound has fallen significantly against the dollar over the past year, increasing inflationary pressures on imported fuel and energy. While the numbers are volatile, the UK's main measure of trading performance, the current account, hit its worst record ever in the first quarter.
As the Bank noted in the minutes of its June meeting when it raised interest rates, core commodity inflation (excluding volatiles such as energy and food) is higher in the UK than in the US and significantly higher than in the Eurozone.
The Brexit factor in action
The obvious question put to Mr Bailey here was about the Brexit factor. Economists predicted that Brexit would make it more difficult to trade inflation and growth, due to both trade barriers and labour shortages. If the predictions of bad results in the UK come true, it would be in line with the current Brexit factor, making inflation more resilient than elsewhere and potentially requiring a higher rate hike.
A smaller pool of workers should mean that the UK labour market has become less flexible. British chambers of commerce yesterday asked the government to urgently review the job shortage list as hotels and restaurants turn away customers due to a lack of staff.
Post-pandemic challenges
Another mechanism cited by politicians is that British companies see less competition from Europe and increase margins and therefore prices. According to the governor, it is still difficult to say about the real figures. Post-pandemic supply chain problems are difficult to distinguish from post-Brexit issues, he said.
Moreover, it is far from certain that these predictions will come true. The German economy is very sensitive to possible energy shortages due to tensions with Russia. The Eurozone itself is once again under internal pressure, with the risk of a repeat of the smouldering crisis from a decade ago.
So far, the general energy shock explains much of the inflation we have observed. The structure of the energy price ceiling may explain why we have reached our peak now and not in the rest of Europe. But if those inflation rates here in the UK stay higher for longer than in the rest of the advanced European and global economies in the coming year, the shadow of the post-Brexit policy changes that really hit this country will begin to emerge.
Persona Finance team aims to help business to survive and expand in turbulent time. Please contact us for consultations or for any other business or accounting questions at [enquiries@personafinance.co.uk].
