AS WE HEAR perhaps a little too often, the government is keen to keep growth at the front of its business agenda. However, a recent report by the Centre for Business and Economic Research (CEBR) has cast a shadow over these plans, suggesting the UK will struggle to grow in any meaningful way over the next few years. This is due to predictions of inflation remaining high. As well as this, the move higher in the £/€ rate has put the dampeners on hopes for increased sales into the UK’s largest export market. Europe is where around 50% of UK exports touch down.
It doesn’t take a genius to realise the majority of households and businesses will have experienced squeezed finances and negative growth over the past few years; a direct result of consumer goods prices rising alongside falling incomes. Stagflation, as this scenario is called, presents a unique dilemma for central banks and governments. With their dual remit to tackle inflation and stimulate growth their nightmare scenario is to be presented with neither.
In a stagflationary environment the Bank of England and government would be forced to make stark choices; either to loosen monetary policy in an attempt to tackle the lack of growth through quantitative easing or rate reduction; or to hike interest rates. Doing this in a negative growth environment is necessary to prevent inflation from running out of control, but can have a further dramatic effect on growth, and not in a good way. Each of these outcomes would have a direct impact on UK business and the predicament facing financial directors.
It would however, be wise to look at the bigger picture before any business struggling to hits its target figures starts to develop its performance excuse plan. The situation elsewhere is not quite so dramatic. In fact the latest PMI (Purchasing Managers Index) figures for the UK show a different picture to that presented by the CEBR. Compared to the tales of double dip recession that followed our latest GDP release, the figures, which measure activity on the private sector, were more cheery.
The good news is that for now, the private sector is growing in the UK; helped in part by the recent strengthening of Sterling; this has led to slower growth in raw material prices. Despite this, the Bank of England and the Government remain anxious about the outlook for UK growth. A sentiment echoed by MPC “über-dove” Adam Posen who as recently as last week voiced his regret that he overestimated the UK’s ability to recover against a backdrop of slowing global growth and a worsening debt crisis in Europe. For now the recent data is not supporting this view. And what of inflation? The current situation is not as bad as you might think. Recent CPI figures have shown a decrease of almost 2% in the annual rate since mid-2011. With the Pound on the rise again, it could be that imports into the UK will continue to cheapen. Stagflation is a threat, and something that all finance directors need to prepare for; particularly as the situation in Europe continues to worsen, but the time to panic is not yet upon us.
Mark Thompson is head of the corporate desk at foreign exchange experts; Global Reach Partners
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