This article titled "The spectre of stagflation looms over the economy. This time it’s scarier than ever" was written by , for The Observer on Sunday 30th October 2016 06.00 UTCAs we near Halloween night, there is a growing sense of foreboding about the economy’s prospects next year, even among Brexiters. The one word that is having a chilling effect – stagflation – is best known from its 1970s incarnation, when it wrought havoc throughout the land.
The combination of stagnant GDP growth and high inflation pushed the country to the edge of bankruptcy and forced the then chancellor, Denis Healey, to call the International Monetary Fund for a bailout loan. Its resurrection can only spell bad news.
The former Bank of England policymaker Adam Posen is past trick-or-treating and is not known for scaremongering, but he was doing his best Jack-Nicholson-in-The-Shining impression last week when he said Britain would suffer “permanent damage” from the Brexit vote.
The economist, who is back in his native US running a thinktank, likened the UK to an athlete who injures an ankle and gets arthritis. They limp on. “They’re not dead,” he said, but can’t run with the major league players any more. What word summed up the nightmarish future? Stagflation, he sighed.
At the heart of this argument is a forecast for rising inflation and slowing wage rises in 2017 that will kill off today’s healthy GDP growth. The increase in inflation is a global trend driven by higher oil and commodity prices, made worse by the 18% fall in the pound since the referendum. Slowing wage rises follow the uncertainty that infects all business investment decisions in the UK, as firms delay or cancel the purchase of new equipment that enhances productivity.
This could all be set aside as a temporary situation, much as it was in 2011 and 2012, when Posen was a member of the Bank’s monetary policy committee and inflation stood at 5%.
Back then the political situation was stable, and interest rates were not just at rock bottom, they were priced by the markets as being low for the next 30 years.
To boost growth, the Bank began a second phase of quantitative easing, taking the total stimulus package to £375bn, safe in the knowledge that politicians and central bankers were aligned.
The backdrop to the Brexit vote is different. For one thing, the political situation is full of uncertainties. Businesses rightly ask whether Theresa May wants to stay inside the European Union’s single market or the customs union or neither.
There was a clue in the deal with Nissan, which was widely interpreted as signalling that she wants to stay in the customs union. But it could be that she panicked when faced with the closure of a world-beating car factory and carved out a special package offsetting the impact of Brexit.
May has refused to shed any light on the details of her apparently cosy deal with the Japanese carmaker, and so speculation fills the void, emphasising the lack of coherent thinking at the top of her government. Worse, May and some former colleagues have painted Threadneedle Street as the enemy of good government, adding to the unease.
Investors are also concerned about the impact of rising yields on government bonds, which determine the rate at which nations can borrow. UK gilt yields have doubled since the vote, forcing the Treasury to pay more to finance its debts.
And there are more threats waiting in the wings. The US central bank is poised to raise interest rates in December after third-quarter growth beat expectations to hit an annualised 2.9%.
Higher interest rates across the Atlantic will attract money away from the UK to US banks, pushing the pound down further. If this feeds into higher import prices and ratchets up inflation, disposable incomes will slump even more.
As we saw from the UK’s third-quarter GDP figures last week, the economy is currently buoyant, but almost entirely dependent on consumer spending and without it will probably begin to slowly contract.
If this all sounds overly gloomy, it doesn’t to Posen and many other economists in academia and the City. They’ve seen a ghost of Christmas future, and it scares them.
RBS can’t wind up the spinoffs
When the European Union was handing out punishments for the bailouts of Britain’s banks during the 2008 crisis, one of its wheezes was to force the two institutions which had been the recipients of most of the cash to spin off branch networks. The aim was to create new competitors on the high street and, no doubt, inflict a bit of pain on the way.
Roll on eight years from the drama of the bailouts, and one of those branch networks has emerged. Lloyds Banking Group stripped out TSB in 2013 and floated it on the stock market in 2014, before it was taken over by Sabadell of Spain. It is alive and kicking and grabbing market share in current accounts. It is still tied to its former parent by an IT system, but is trying to cut itself loose.
Contrast that with Royal Bank of Scotland, which has now admitted it will not meet a deadline of the end of 2017 to carve out 300 branches, focused more on small businesses. It has been a messy affair and costs have reached £1.7bn in attempting and failing to meet this deadline. A sale to Santander was aborted. Then there was to be an attempt to float the branches on the stock market – a bit like TSB – by reviving the old brand name of Williams & Glyn. That was abandoned in the summer. Now hopes are on a trade buyer who might be able to cherrypick the most attractive branches.
While this is a costly problem for RBS, which at one point deployed 7,500 on the task of creating a standalone branch network, it is one that has also deprived bank customers of an extra competitor on the high street. Ross McEwan, the RBS chief executive, has admitted that the UK’s departure from the EU is not a cue to give up on the process – and Brussels may not be in the mood to look kindly on Britain’s bailed-out bank during the exit negotiations. It is a mess, and one which could get dirtier if the EU decides to impose its own rules on the selloff process.
John Lewis mustn’t become a soulless profit machine
She’s landed one of the most coveted jobs in retail, but when new John Lewis boss Paula Nickolds takes the helm in January she’ll have her hands full. Profits were already falling in the first half of this year, and the decline of the pound in the wake of the Brexit vote will only add pressure.
Some analysts believe Nickolds needs to do more ruthless cost-cutting than her predecessor, Andy Street. But it’s worth remembering that John Lewis navigated the last downturn successfully precisely because it invested when others cut back.
Cheery, knowledgeable staff in stores and a big step up in online capability proved winners. John Lewis’s partnership model, under which staff own the business, allows for long-term thinking. Staff and customers will thank Nickolds for nurturing its special feel, not turning John Lewis into a soulless profit machine.
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