There is a lot of talk in the media presently about ‘stagflation’. It’s a word that has been around for several decades, particularly in connection with the economy in Japan. The current speculation is whether the British economy is at risk from the phenomenon and what the actual effects of ‘stagflation’ actually are?

The Japanese Experience

The Japanese refer to a period of time from the 1990’s through to the early 2000’s as the ‘Lost Decade’. Japan had seen unprecedented economic growth from the end of WWII through to the 1990’s but the efforts of the Japanese Government to cool down an asset price bubble caused a long period of ‘stagflation’. This is the situation where stagnant economic growth meets rapid inflation and can be very damaging to growth prospects. It also proved to be very long lasting and difficult to fix.

From 1991 to 2003, the Japanese economy, as measured by GDP, grew only by 1.14% annually, while average real growth rate between 2000 to 2010 was about 1%. These rates were well below other industrialised nations.

Is there a threat to the UK?

The spectre of stagflation is now potentially threatening Britain. As well as facing the fastest levels of consumer price growth in four decades, with inflation climbing to around 9 percent, economic growth ground to a halt in February and the economy contracted slightly in March 2022.

The questions being asked currently by economists are around whether Britain faces more persistent problems with avoiding stagflation and economic woes than some other countries in Europe? Britain is currently experiencing issues with recruitment and getting key workers into support roles. Brexit has reduced the previous large European labour pool in the country, and the effects of Covid-19 have changed how many people want to work. Britain, like other countries is also at the mercy of Europe’s energy crisis.

Disposable household incomes in Britain are expected to drop 1.75 percent in 2022. Businesses are struggling to find the solution of how to maintain customer numbers whilst being able to raise their prices. Consumer and business confidence has taken a considerable knock over the last few months.

Extra costs associated with importing goods from the E.U. alongside supply chain issues and energy cost increases are making life difficult for individuals and companies. Stagflation is not an economic situation any country wants to have to deal with but that may be the reality of the next few years.

Keep up with events and take action 

It may be that a rapid end to the war in Ukraine or a cooling of demand for fuel and other products, as we saw during the various lockdowns, will lower pressures on supply chains and help reverse some of the upward price pressures. We will have to see, but in the meantime it’s essential for business owners to understand what challenges may be ahead for the rest of 2022 so they can prepare for whatever they may need to do to counter the impacts on a macro and micro level.

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