Economy slows down as Bank of England slashes forecasts and spectre of stagflation sparks fears for the recovery
- Rates held at 0.1% and QE maintained despite inflation’s rapid rise
- Supply crunch and labour shortages driving up prices for consumers
- Two MPC members voted to cut short quantitative easing
The Bank of England cut its growth expectations for the economy on the same day that data showed Britain’s business bounce-back lost more momentum in September.
The recovery has been losing steam in recent weeks amid rising Covid cases, staff shortages and soaring costs.
The closely watched Composite Purchasing Managers’ Index (PMI) from IHS Markit, which measures activity in both the manufacturing and services sectors, gave a reading of 54.1 – meaning growth in output slowed to its lowest level in seven months.
Running out of steam: The Composite Purchasing Managers’ Index gave a reading of 54.1 – meaning growth in output slowed to its lowest level in seven months
Any number above 50 indicates growth. This was down from 55 in August, and was the lowest reading since lockdown restrictions began to ease.
The glum data came as the Bank of England cut its expectations for growth in the third quarter of the year by around 1 per cent, meaning the economy at the end of September will be around 2.5 per cent smaller than pre-pandemic.
Chris Williamson, chief business economist at IHS Markit, said: ‘The September data will add to worries that the UK economy is heading towards a bout of ‘stagflation’, with growth continuing to trend lower while prices surge ever higher.
‘While there are clear signs that demand is cooling since peaking in the second quarter, the survey also points to business activity being increasingly constrained by shortages of materials and labour, most notably in the manufacturing sector but also in some services firms.
‘A lack of staff and components were especially widely cited as causing falls in output within the food, drink and vehicle manufacturing sectors.’
Despite worries over rising inflation, the Bank of England voted yesterday to keep interest rates at their record low of 0.1 per cent and carry on with its £895billion money-printing programme.
But in a sign that rate hikes could be on the horizon, two of the Bank’s nine-member Monetary Policy Committee voted to cut short this so-called quantitative easing, over fears it could be adding to inflation. Supply chain hold-ups piled pressure on small businesses especially.
The Federation of Small Businesses (FSB) is publishing a report today calling on the Department for International Trade (DIT) to direct support to smaller firms. It wants the Government to make international trade advisers more accessible to tiny companies, and to promote the benefits of international trade deals and make sure they are accessible to those firms.
FSB chairman Mike Cherry said: ‘Small exporters have had a difficult time due to the pandemic, supply chain issues and adapting to the complications associated with the end of the transition period.
‘This has left many facing rising costs, unsure of the future of their small firms and debating the best way to grow and nurture their businesses.
‘Our report has highlighted some key areas which we hope DIT can act upon to positively help small firms who are either looking to begin their exporting journey, or to help current exporters to thrive.’
Could the inflation spike lead to stagflation or a growth spurt?
CPI inflation jumped by the largest monthly amount on record to hit 3.2% in August – this was higher than expected and it is forecast to keep rising.
A supply crunch meeting a wall of demand has been blamed for the inflation spike, but other factors such as high energy prices and staff shortages are now coming into play too.
With costs rising, wages increasing and demand running hot, is a risk of inflation running out of control about to prompt the Bank of England to raise interest rates?
And is this just the start of a recovery that will finally see the economy step up a structural gear, or will growth slow and a gloomy report that warned of stagflation prove accurate?
On this podcast, Georgie Frost, Lee Boyce and Simon Lambert discuss inflation and the supply crunch.