Stagflation Hitting The UK

Last night the British PM outlined her ‘hard Brexit’ plan which saw the FTSE drop nearly 1.5% or 107 points and the GBP surge, adding to the USD’s woes.  Gold of course rose, now its 7^th consecutive day of rises, the longest streak since last November.

The Guardian ran an article highlighting the UK’s challenges ahead just as Bank of England’s Carney said on Monday that he sees consumption-lead growth as ‘less durable’ and flagging the challenging environment of rising inflation but poor growth – the so called ‘stagflation’ trap we’ve written of before.  Here is the closing few paragraphs that summarise the dilemma succinctly:

“In this context, the Bank of England will eventually need to bite the bullet and begin increasing interest rates if it is to keep CPI anywhere near the 2% target. Combined with soaring energy prices, this will place the brakes on growth. While a recession may not be in store in 2017, slower growth almost certainly is.

If this unpleasant, “stagflationary” mix of sharply rising prices yet slowing growth sounds a bit like what occurred in the 1970s, that’s because it is. The fact is the UK has been living on borrowed time and borrowed money ever since the financial crisis struck in 2008. Sterling devalued sharply back then as the Bank slashed rates to zero and began QE. These “emergency” measures, now in place for over eight years, have kept the economy on life support by subsidising a huge expansion of debt, public and private, and the associated property bubble. They have not created the necessary conditions for a truly self-sustaining economic recovery. Indeed, the opposite could be argued, that by keeping the monetary spigot open for so long the Bank has encouraged debt-fuelled speculation rather than a salutary economic de-leveraging.

As the Bank finally moves to raise rates in response to sharply higher inflation, bond yields are likely to rise and share prices may well decline or, at a minimum, fail to keep pace with the cost of living. The much-maligned British saver, suffering for years from artificially low interest rates, is only going to find things getting worse as portfolio valuations decline. Borrowers, meanwhile, will find they are tapped out.

They call economics the “dismal science” for good reason. There is no free lunch. With inflation finally on the rise, the QE piper will now need to be paid.”

This may sound like a familiar set up to Aussies as well….