UK economy in 'light form of stagflation'
|The September PMIs of business activity were weaker than expected last week, with the composite index slumping to barely above the key level of 50 that separates growth from contraction.
The data suggests that the British economy is now growing at a sluggish sub 1% rate, even as inflation is stuck at around 4%. We would describe this as a light form of stagflation: a low growth, high inflation (but also low unemployment) economy.
This background is consistent with current sterling levels, but the tail risk continues to be those fears surrounding the upcoming Autumn Budget causing another leg down in the gilt market.
The job of balancing the books was made all the more challenging on Friday following OBR’s downgrade of the UK’s productivity forecasts, which has reportedly helped open up a £30bn gap in the public finances.
For now, the pound remains relatively stable, but this could change could markets fear perpetual tax hikes ahead.
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