As high inflation persists in Britain, concerns grow over economic slowdown
As Britain's inflation rockets to a point unseen in decades -- and shows no sign of abating despite the government's scramble to cope -- concerns are mounting over the possibility of an economic slowdown.
Energy prices are high and fluctuating; many gauges fail to point to a pickup; economic activities are slowing; consumer confidence is ebbing; households are feeling the squeeze and the authorities are under fire for doing too little or being too late.
INFLATION TAKES HOLD
Britain is witnessing higher inflation than other Group of Seven countries, given its status as a net importer of energy. The timing couldn't be worse. Global prices are ballooning on fears over supply disruption, Britain's currency is in a Brexit slump and worker shortages are rampant, according to a Guardian analysis.
A quick fix is out of the question. Hitting 9 percent in April already, inflation is expected to reach more than 10 percent by the end of this year. A YouGov survey in May showed that 62 percent of respondents considered the economy as the most critical issue facing the country.
"Britain is at last stepping out of the pandemic that has dominated the last two years -- only to step straight into a huge cost of living crisis that will be the defining economic feature of what remains of this parliament," said Torsten Bell, chief executive at the London-based think tank Resolution Foundation.
Alongside the price spike, financial squeezes facing households have become broad. Wages have failed to keep pace with rising prices. While regular pay excluding bonuses rose 4.2 percent from January to March, it fell by 1.2 percent when adjusted for inflation, according to the Office for National Statistics.
Charities are probably among the first to feel the pressure. Two million older households will have insufficient income to cover their essential spending this year, with almost half of these living in poverty or just above the poverty line, according to British charity Age UK.
Billy McGranaghan, founder of British charity Dads House, told Xinhua that food banks are now classless. "Before it used to just be people who were on benefits. Now it's not," he said. Donations also went down by half because people have lost that part of their disposable income.
"In the next five months in the UK, I think we're going to see a poverty we have never seen since the second world war," he noted.
Leo Scott, a resident in London, considered himself lucky to have the food banks. He had just discussed the surging prices with his mother before talking to Xinhua.
"We're all feeling it. Price hike with energy bills and also food," he said. "And then is it going to get any better? Who knows."
To ease the raging cost-of-living crisis, Britain announced in May a 25-percent levy on profits of oil and gas companies to partly fund a support package mainly targeted at vulnerable households. It was widely applauded as lower-income groups were believed to take the brunt of the shock since key drivers of inflation were the surging prices of food and energy.
Opponents, however, argued it would undermine investor confidence. Investor confidence depended on predictable taxes, said Deirdre Michie, chief executive of Offshore Energies UK, an association representing 400 companies in the offshore oil, wind and gas sector.
"This is an industry that thinks and plans long-term, meaning years and decades, so sudden new costs, like this proposed tax, will disrupt planning and investment and above all undermine investor confidence," Michie said.
The Purchasing Managers' Index (PMI), widely used to forecast economic trends, bodes ill for the British economy. Growth of its manufacturing and services sectors slowed to a 15-month low in May, as S&P Global's flash Composite PMI fell sharply, and service providers signaled the greatest loss of momentum.
"The deterioration in the services PMI component shows that headwinds coming from accelerating inflation, rising interest rates and higher taxes (i.e. National Insurance) are weighing down on the UK economic outlook in 2023," said Daniel Casali, chief investment strategist at British wealth manager Tilney Smith & Williamson.
Meanwhile, market research company GfK saw its Consumer Confidence Index for Britain in May drop to its lowest level since records began in 1974. "This means consumer confidence is now weaker than in the darkest days of the global banking crisis, the impact of Brexit on the economy, or the COVID shutdown," said Joe Staton, client strategy director at GfK.
A comparison of independent forecasts for the economy published by the Treasury in May showed an average forecast of 3.9 percent for GDP growth in 2022 and 1.3 percent for 2023, down from April's 4.1 percent and 1.5 percent, or February's 4.4 percent and 2 percent.
Pessimism grew sharply as official statistics showed Britain's GDP fell 0.1 percent in March after registering no growth in February. It seemed likely that the economy would contract in the second quarter, said Paul Dales, chief UK economist at the London-based consultancy Capital Economics.
"And with the full hit of the cost of living crisis yet to be felt, the chances of a recession have just risen," Dales added.
Amid the chaos, the Bank of England was in the spotlight. While the central bank raised its benchmark interest rate in May for the fourth time in a row, some experts say inflation and rising energy prices were partly out of its control. Bank of England governor Andrew Bailey has said he was unable to stop inflation from hitting 10 percent this year.
As the bank was stuck between a rock and a hard place, the government scrambled. Dales said the government's support package is a net fiscal stimulus equaling 0.5 percent of the GDP since it is not fully funded by tax rises elsewhere, meaning public borrowing will be higher and GDP growth will be a bit stronger.
However, the actions are adding to the already extensive inflationary pressure, Dales added. "Other things being equal, this loosening in fiscal policy means that to bring inflation back down to the 2 percent target monetary policy will need to be tighter."
Yet another economic time bomb would be the raising tensions between Britain and the European Union. Disputes over a post-Brexit trade deal continued at the beginning of June as Prime Minister Boris Johnson on Wednesday called again for changes to the checks on goods entering Northern Ireland. The bloc has dismissed the possibility of renegotiation and warned of a trade war.
Post-Brexit import controls and the uncertainties surrounding Britain-EU trade have dealt a blow to businesses. If the tariffs were to increase, it would stoke inflation even further and put more pressure on Britain's economic growth, analysts have said.