Stagflation and recession warnings plague UK businesses

In the fight against the price spike, Sean Hughes was willing to try anything to keep costs down at his gastropub, Dylans at The Kings Arms. This includes adding less traditional favorites to favorites like Scottish ribs and eggs. The latest: confit beef tongue.

His diners in St. Albans, a relatively affluent commuter town north of London, have overcome their initial hesitation, he insists, and the tongue, a cheaper cut of beef, has become a popular choice. But that’s how her menus are determined now, by cost.

Meat prices, Hughes said, rose by a third. A 20-liter can of canola oil has increased to 38 British pounds (around $ 48) from £ 14. Breweries are raising beer prices. Salary costs have increased by 20% as it strives to keep staff in a competitive market. At the same time, he is trying to keep the prices on the menu stable.

“It’s a very, very, very delicate balancing act at the moment,” Hughes said. “It’s definitely not some kind of boom recovery we were all hoping for.”

Instead, Britain is staring at the specter of stagflation, a ruinous mix of stagnant economic growth and rapid inflation. A conservative lawmaker first used the word in Parliament in 1965, and it was a chilling warning of what would happen over the next two decades: Unemployment has soared and inflation has risen to double digits amid worker strikes and political instability. Ever since the bleak economy of the 1970s and the prospects of the return of stagflation have haunted British political leaders.

While there are no strong unions pushing wages across the country or a growing number of unemployed as there was in the 1970s, there are just enough spurts of stagflation to cause alarm.

Britain is experiencing the fastest pace of consumer price growth in four decades, with an inflation rate of 9 percent. Economic growth stopped in February and then contracted slightly in March. The situation is expected to worsen: inflation will peak above 10% this year and the economy will contract next year, the Bank of England predicts.

Businesses are seeing problems coming and are trying to cut costs. Mr. Hughes keeps his pub closed one extra day a week to save on energy costs and wages. And this is hit before the worst of the price increases. He has been insulated from the surge in gas and electricity prices by a fixed contract but expects his energy costs to rise in November to £ 48,000 a year from £ 19,000. In his other pub, The Boot, a stone’s throw away in St Albans, energy costs will triple.

“Rising energy prices affect every single aspect of the business, so there’s no getting around it,” said Hughes. At the same time, he is concerned about the increase in household bills that his customers have to pay. “People are going to have to save that money,” he said.

Across the hospitality industry, demand has not declined as rapidly as might have been expected, said Kate Nicholls, chief executive of UKHospitality, a lobby group that pushed for a return to value-added tax rates. Lower (VAT), a type of sales tax The worst, he predicts, will come after the summer. But what plagues businesses is uncertainty.

“Many people have not lived or worked in an environment of high inflation, and so we don’t know what the impact will be,” said Ms Nicholls. It is unclear whether consumers will “react very strongly” with fear or continue to spend, she said.

Rising prices are inflicting pain around the world and recession warnings are flashing in Europe and the United States, but there is concern that Britain faces more persistent problems as it suffers the worst of problems in Europe and the United States. United States.

“We are heavily exposed to the European shock in energy prices and, like the United States, we have a tight labor market,” Chancellor of the Exchequer Rishi Sunak told lawmakers late last month.

A UK government cap on household energy bills is being restored every six months and is expected to do so in October increase by £ 800, to £ 2,800 per year, as households are expected to pay for the recent rise in oil and gas costs. The leap is almost as big as the increase in April. (The limit does not apply to business energy bills.)

While statisticians say most of the acceleration in inflation can be attributed to energy, above-average price increases are spreading to more goods and services. Many cost increases for businesses have not yet been passed on to consumers because there is a delay, said Tera Allas, director of research and economics at McKinsey’s office in Britain and Ireland and a former economist in the civil service. .

“There is still a lot of momentum to be done before all those company-to-company prices turn into consumer prices,” she said.

Britain’s rigid labor market is also fueling inflationary pressures. For the first time, there are more job vacancies than job seekers. This is raising wages, not enough to keep up with inflation, but enough to upset central bankers. At the Bank of England, officials were surprised at the magnitude and persistence of the decline in the size of the workforce since the start of the pandemic, as the long-term disease keeps hundreds of thousands out of work.

Underlying all of this is Brexit. A large pool of European workers is no longer easily accessible or interested in working in Britain. During the pandemic, encouraged by the blockades, more citizens of the European Union left Britain than arrived. Companies that import goods of the continental bloc have complained that excess bureaucracy is increasing their costs, while economists at the London School of Economics say that the divorce with the European Union has pushed food prices to rise by 6%..

Adam Posen and Lucas Rengifo-Keller of the Peterson Institute for International Economics in Washington identify Brexit as the reason that Britain has a higher core inflation rate, which eliminates the initial impact of food and energy price volatility, compared to other major European economies, including Germany, France and Italy.

By putting an end to the free movement of people and by increasing tariffs and other barriers to European trade, they argue that the British government “created inflation”.

Businesses are now making complicated calculations of how high they can push their prices to offset their rising costs without turning customers away. In April, taxes and energy bills rose for tens of millions of households and an indicator of consumer confidence dropped to lows last seen during the 2008 global financial crisis.

Raindrops on Roses, a gift shop in St Albans, couldn’t help but raise some of its prices. For example, the price of a Cornish candle brand jumped 22%. Shoppers at the store, which donates its profits to a cancer charity, are worried for the first time that they will end up with products that don’t sell.

“We are more cautious about the amount of shares we are ordering,” said Karolina Birsen, one of the managers. “Less spontaneous, more calculated.”

According to the Bank of England, disposable household incomes, once adjusted for inflation, are expected to decline by 1.75% this year. This would be the second-largest decline since registrations began in 1964, the bank said. There are already signs of consumer spending losing momentum. Retail sales have fallen from last summer. Throughout May, credit and debit card spending declined.

Donna Nichol opened Chloe James, a clothing store in St Albans, in 2010, when Britain was just out of recession, and has had a lot of experience running her business in adverse economic times. After the pandemic, she said, she felt she could handle anything.

But in late May, a serious test for his sense of invincibility emerged: a letter from his electricity supplier. The price it should pay is more than double.

“I don’t think there is anything I could do to cut costs,” Ms. Nichol said. During the pandemic, she changed host of her website and trash collector and re-evaluated her phone company. “I’ve been through it before with a fine-toothed comb.”

In St Albans, around 200 businesses use a WhatsApp group to support each other and share tips on how to save money, such as exchanging furniture and catering equipment. Mandy McNeil, director of the board of directors of the local Business Improvement District, which provides marketing and lobbying, said some retail and hospitality businesses told her they saw a 20% drop in earnings recently.

“We now have a precipice for some” due to rising energy and other costs, McNeil said.

The Treasury has plummeted in the last month with £ 15 billion in support for families after growing pressure from opposition politicians and economists. Each household will receive £ 400 off their utility bills in October and millions of people living on low incomes or retirees receiving government aid or people with disability benefits will receive several hundred pounds more this year.

Even with that government help in mind, Andrew Goodwin, British chief economist at Oxford Economics, predicts consumer spending will plummet in the second half of the year. But the country should avoid a recession, he said, and its prospects improve provisionally next year.

“This is not an era of high inflation,” he said. “High inflation is temporary,” she added, as it is likely to dampen demand and slow the economy.

Meanwhile, businesses are trying to make it through this inflationary period, unsure whether government payments, household savings, or a broad desire to enjoy post-lockdown life will be enough to sustain them through price hikes not seen in a year. generation.

For companies with high energy needs, such as hospitality businesses that handle crowded kitchens, “we’re going to see big problems approaching the new year unless we get a massive reform,” said Hughes, who advocates a VAT cut.