The United Kingdom is dealing with a dangerous return to stagflation, posing a threat to Chancellor Jeremy Hunt’s fiscal plan. Just a few months ago, the UK economy was thriving and on course to be the second-fastest growing economy in the G7. New data has revealed an alarming picture. The economy is only growing by 0.1% over the July to September quarter. It was a wretched number that missed economists’ predictions by a wide margin and points to an approaching standstill.
This disappointing growth, while bad news, came after the UK economy had proved unexpectedly resilient through the first half of the year. This increase hasn’t lifted the region out of the cycle of sluggish economic development that has long plagued the region. The country is now dealing with a massive fiscal hole that makes government planning and spending programs nearly impossible.
As consumer demand is key in this economic form, consumer behavior is central to this new economic reality. Though UK consumers have so far been able to keep up high savings rates, they are spending less than expected. This play-it-safe approach to spending might be part of the broader slowdown, making the government’s fiscal situation even tougher.
Interestingly, the cost of government borrowing has decreased significantly, potentially offering some relief to would-be policymakers. Spot two-year and five-year UK government borrowing rates have fallen sharply. They’re actually beneath the rates the Labour Party inherited upon entering office. This drop in gas revenues may do some needed alleviation of fiduciary burdens. Even that doesn’t come close to addressing the fiscal chasm our federal government is hurtling toward.
The economy experienced a double whammy in September, when the economy contracted, bringing more uncertainty to future policy decisions. Either way, the UK policymakers have their work cut out for them. The unpredictable expansion may require them to face painful tradeoffs on fiscal discipline and support for domestic priorities.