Reasons to worry but fears of stagflation unfounded

Professor Joe Nellis serves as the Chief Economic Advisor to MHA. In light of the recent growth forecasts released by the Government, he asserts that concerns over stagflation are unwarranted.

Growth for Q4 of 0.1% marks a difficult end to 2024, with faltering growth in Q3 and Q4 symptomatic of the economic challenges facing the UK.

The Government’s push for growth has not been helped by the Chancellor’s October Budget. While the measures are not implemented until April, businesses have been making decisions in preparation for the increases in employer NICs and the minimum wage that have led to decreased investment.

To reignite the economy, it’s necessary to stimulate investment through both the private and public sector. While the Government has failed — so far — to encourage the private sector, a boost to public expenditure has been announced. However, there is now a worry that a backtrack is on the cards when the Chancellor announces her Spring Statement on 26th March.

With a lack of growth and an increase in borrowing costs wiping out much of the Chancellor’s fiscal headroom, something must be done to continue funding current expenditure. While tax rises could provide these funds, this is unlikely. It is far more likely that the Chancellor will be forced to reverse her previous spending commitments and make the unenviable decision of prescribing tighter government spending.

Yet, the doomsayers are perhaps getting ahead of themselves.

‘Stagflation’ — the term used to describe rising inflation, slow or flatlining growth, and rising unemployment — has been the word on everyone’s lips. This comparison is overly pessimistic. Our current economic malaise — and it is a malaise — is a world away from the stagflation of the 1970s.

At the height of stagflation in 1974 and 1975, the UK economy contracted by 2.5% and 1.5% a year respectively. While the Bank of England lowering its growth forecast to 0.75% is indicative of a slowing economy and offers a disappointing outlook, it is hardly comparable.

The inflationary conditions offer an even more shaky comparison. Since dropping below 3% in April 2024, year-on-year inflation has not risen above 2.6% — in the years 1973 to 1979, the annual inflation rate did not drop below 8.3% and was often more than 10%.

The economic landscape is uninspiring, but it’s important to remember the full extent of the economic distress that dogged the 1970s before evoking fears of stagflation.