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Stagflation is engulfing the UK economy, showing what could be in store for the US and Europe

Talk of “stagflation,” the dreaded combination of stagnant growth and runaway inflation, is growing louder in the United States after the economy contracted for two straight quarters.

Of course, inflation is hot and the economy is dangerously close to a recession. Yet many still expect the next two years to deliver relatively strong growth, and this after a rapid rebound from the coronavirus crisis.

Over the pond in the UK, however, things are different. Economists say Britain is heading for a period of stagflation, with growth set to slow to a slowdown next year.

UK inflation hit a new 40-year high of 9.4% in June as fuel prices jumped, official data showed. That’s higher than any other G7 country, Canada, France, Germany, Italy, Japan and the United States. It is likely to exceed double digits before the end of the year.

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Soaring prices, rising interest rates, tax hikes and Brexit are all hitting the UK economy at the same time. The country’s gross domestic product will grow just 0.7% next year, the worst performance in the G7, private sector economists polled by Bloomberg predict.

The Bank of England is even more pessimistic. He thinks GDP is expected to shrink slightly in 2023 and only grow by 0.25% the following year.

Meanwhile, economists expect the US economy, which has fared much better during COVID, to grow 1.3% in 2023. And they think eurozone GDP will grow by the same amount. amount.

UK leaders are under pressure

For policymakers in the United States and Europe’s best-performing economies, Britain holds a warning of what could happen if things go wrong.

Britain’s leaders are coming under increasing pressure over the bleak outlook. Railway workers, lawyers and postmen are striking as the cost of living skyrockets. Consumer confidence has plunged.

In fiery televised debates this month, potential successors to Boris Johnson as British Prime Minister inadvertently trashed the government’s economic record.

“All your bills, every month, they’re going up more and more,” said Rishi Sunak, who has led Britain’s economy ministry for the past three years. The other candidate, Foreign Secretary Liz Truss, said the UK was facing “the worst economic crisis for a generation”.

Energy bills are skyrocketing

At the heart of the UK’s woes is an inflation rate that exceeds that of other wealthy countries and is expected to continue to rise this year.

The country’s energy price cap, designed to ease the burden on utility bill payers, is now adding to the pain.

The cap jumped 54% in April and is expected to rise by a similar amount in October to reflect a spike in oil and gas prices sparked by Russia’s invasion of Ukraine.

“Energy prices are going up and staying there longer, rather than going down with the market,” Sanjay Raja, chief UK economist at Deutsche Bank, told Insider.

A sudden drop in Pound sterling made it worse, Raja said. It has fallen about 11% this year against the dollar as the Federal Reserve’s rate hikes sucked money out of the United States. The UK imports much of its food and energy, and a weaker pound makes such purchases even more expensive.

The workforce has decreased

As well as a European-style energy shock, the UK is suffering from a problem more familiar to the US: a labor shortage. More than 400,000 people have left the labor market since the start of the pandemic, economists estimate, about half of them due to long-term illnesses.

Firms are raising wages as they compete for a smaller pool of workers, adding to pressure on prices, according to Ruth Gregory, senior UK economist at consultancy Capital Economics.