The UK is expected to slide into a situation resembling stagflation, according to OECD forecasts published on Wednesday. After 3.6 per cent growth in gross domestic product (GDP) this year, the OECD expects it to fall to 0 per cent next year, with inflation staying at 7.4 per cent due to the war in Ukraine, global supply chain issues and “a bit of Brexit”.
Next week we will get a window into how the UK economy is performing in the short term. On Monday, April GDP figures are expected to show a 0.2 per cent increase month on month. A slight improvement on March when GDP fell 0.1 per cent, but nothing to shout home about.
The issue with the UK is that it is experiencing high inflation without corresponding demand growth. UK inflation is currently at a 9 per cent annual rate – just ahead of the US. However, the US has had faster GDP and productivity growth, which has meant lower-income wages have been rising faster.
In the UK, real wages are falling. On Tuesday, the Office for National Statistics will publish its employment report, which is expected to show April annual wage growth including bonuses of just 5.4 per cent, well below the inflation rate. This is hitting consumer spending – in May retail sales fell 1.1 per cent on an annual basis.
Lack of wage growth is bad for most of us, but will please Bank of England governor Andrew Bailey, who asked businesses to refrain from implementing wage hikes. However, falling real wages won’t stop the monetary policy committee voting for more interest rate rises on Thursday. Expectations are for another 25 basis point hike to 1.25 per cent.
In the US, the Federal Reserve (Fed) will also be making a decision on what it does with interest rates. Expectation is for around a 50 basis point hike to 1.5 per cent. However, a recent weak trading update from retailer Target (US:TGT) suggests consumer demand could already be weakening, which might encourage the Fed to take a slightly more dovish approach. Slackening demand for goods in the US is good news for everyone fighting inflation. When the world's largest economy starts importing less it's a mighty relief for strained supply chains.
