Stagflation looms as economy shrinks amid high inflation and falling pay packets

ONS GDP data published today (Thursday) show the economy contracted by 0.1 per cent in March with growth in Q1 as a whole coming in at 0.8 per cent, down from 1.3 per cent in Q4.

The fall was driven by consumer-facing services, which fell by 1.8 per cent in March, with retail and car sales falling particularly sharply.

With consumer confidence currently at record lows, and the Bank of England forecasting that inflation is set to peak at 10.4 per cent towards the end of this year, the outlook is bleak and the risk of stagflation is rising. Real household labour income is forecast to fall by £34 billion this year – equivalent to around £1,200 on average for each UK household.

James Smith, Research Director at the Resolution Foundation, said:

“The UK started the year with a rapid recovery from the pandemic. But the economy already appears to be losing momentum as the cost of living crisis intensifies and the risk of stagflation looms.

“The economy contracted in March amid rising inflation and falling incomes. With consumer confidence at historic lows and inflation forecast to rise to double digit levels later this year, causing average pay packets to fall by £1,200, there is a clear risk that we slide into recession.

“The Government can’t shield everyone from all of its impact, but it should provide further targeted support to the low-and-middle income households who will be worst affected.”