The UK economy is stagnating, but it may prove difficult to implement policies to achieve growth, according to a range of market participants.
Guy Miller, head of macroeconomics at Zurich, was commenting in light of the most recent GDP data in the UK pointing to a contraction of 0.1 per cent in the final three months of 2023, mirroring similar data points in the Eurozone.
Miller’s view is that “it doesn’t really matter if the number is -0.1 per cent, or -0.2 per cent, or positive 0.1 per cent or 0.2 per cent. Either way, what is happening is stagnation, and the growth dynamic isn’t there.
"What we have now in the UK and Europe is a bifurcated economy, manufacturing is weak but the services sector is expanding. People have jobs and are getting paid more to do those jobs.”
He says that while the UK’s headline rate of CPI has fallen markedly, “it is still around double the target rate of 2 per cent. And if you look at service sector inflation, that is above 6 per cent.
"A lot of what is happening, is global economies are still trying to digest the impact of the pandemic restrictions. There were really major distortions and those are global trends, they are evident everywhere, except in China.
"Everywhere else, manufacturing is sluggish because people bought a lot of stuff during the lockdowns, so demand is weaker, while on the supply side, supply chains have reopened."
But while the factors contributing to higher services sector inflation are, in Miller’s view, global in nature, he says the Bank of England is the only major central bank where two of its policymakers, specifically members of the monetary policy committee, voted at their most recent meeting to raise rates.
Miller says there are two factors responsible for this: one is the persistence of wage growth; and the second is the prospect that in the forthcoming Budget the UK will implement measures, such as tax cuts, which would be expected to ferment short-term growth.
Tightrope walking
But Miller says "the BoE may look at that, at a time of full employment in the UK, and wonder if those measures in the Budget will work against what they are trying to do," by proving to be inflationary, and he feels this may prompt the BoE to delay rate cuts, or indeed be forced to raise rates, regardless of the growth outlook.
Lothar Mentel, chief investment officer at Tatton Asset Management, says a rate cut by the BoE may be justified now as both real and nominal GDP growth have not moved above zero over the past two years.
Real GDP growth, which is the number cited in the media, is GDP growth after the impact of inflation, while nominal GDP growth is the number including inflation.
To get the nominal GDP growth number, one should add together the quoted real GDP number and the quoted inflation number.
