UK still grapples with stagflation

Susannah Streeter, head of money and markets, Hargreaves Lansdown.

The UK eked out growth in August, but only just, demonstrating how the burden of high borrowing costs and the wider cost-of-living crisis is still weighing hard on consumer and company sentiment. The picture being painted by this numbers is of an economy only just grinding forward, with the services sector accounting for any growth while production and construction activity has fallen sharply.

We still haven’t felt the full effect of previous rate hikes, and so the prospects of recession are still looming on the horizon with so little respite expected on sideswiped budgets. At the very most, it appears the UK is in a period of stagflation, with the economy stagnating while inflation stays elevated. It does represent a significant recovery though from July although growth for the month has also been revised down to 0.6% from 0.5% indicating that the combination of strikes and poor weather was even more toxic than first thought.

As the rain continued through August, combined with a squeeze on budgets August proved to be a very dismal month for the arts, entertainment, and recreation industry. Overall activity in this sector of the economy fell by 7.4%. Downpours disrupted festivals and outdoor arts events and sporting fixtures, with wellies and mud a difficult substitute for hoped for sandals and sunshine. Activity in services was supported by an end to the teachers strike, as holidays aren’t counted, and also a boost in business for consultants, architects, engineers and laboratory testing.

With little momentum in the economy and plenty of risk that the hike in borrowing costs will take a greater toll during the months to come, Bank of England policymakers look set to keep the pause button held on interest rate hikes.

… while Labour focuses on economic security amid global headwinds

“Set against the backdrop of considerable financial turbulence, Rachel Reeves put delivering economic security at the core of her promises.

Amid a surge in oil prices following attacks in Israel, which have sparked fresh inflationary worries, Labour is intent in showing it has a steady hand on the tiller to deal with global forces buffeting Britain. In her commanding manner and her choice of words – promising ‘iron discipline’ in handling the economy – she delivered echoes of Margaret Thatcher. That image didn’t dent the applause in the room and clearly was targeted at winning over wavering Conservative voters.

The cost-of-living crisis and supporting family finances will be at the heart of their campaign, in an appeal direct to voters. But there was plenty targeted at business too, in a bid to persuade more corporates to back Labour’s march for power The endorsement of Rachel Reeves from former Bank of England governor Mark Carney was highly targeted at the crowds of commercial pass holders crammed into the conference hall in Liverpool.

Her vision for growth depends on investment coming thick and fast into the coffers of the new national wealth fund, to catalyse expansion across some of Britain’s most successful industries – from life sciences to creative industries and financial services. The focus of her very broad speech was not on taxing and spending but investing and building. Bolstering confidence in her vision for a new business model for Britain will be crucial for that money to start flowing, because relying on efficiency drives and tax tinkering won’t fund her promises.’’