By David Goodman
The UK looks to be facing “a perfect inflationary storm” that could plunge the economy into a recession next year, according to Gavekal Research.
Surging energy prices coupled with a “just in time” approach to imports, labor market shortages and disruption in supply chains mean there’s a danger of a more generalized increase in prices across the economy, the firm that advises investors wrote in a note Friday.
Gavekal said that scenario could reduce the appeal of UK assets at the moment when the nation needs foreign capital to replace the Bank of England as a key buyer of government bonds. It also would hurt the value of the pound, which fell as much as 2 % this week.
That situation, an echo of Britain’s experience in the 1970s, raises the prospect of further sterling weakness. That would follow a 2% plunge this week that Gavekal said reflected the
“Stagflationary fears stalking markets” for Britain raise risks of that the 1970s experience of slowing growth and rising inflation will be repeated, Gavekal’s Nick Andrews wrote in a note to clients. “This combination of fighting inflation at a time of high energy prices means the UK economy will likely face a recession in 2022.”
Andrews said the BOE should focus on inflation to preserve the value of the pound and attract foreign investment flows.
His prediction is more pessimistic than most economists, who expect a solid year of growth in the UK after the worst recession in decades. The BOE in August forecast a 6% expansion in 2022. Economist surveyed by Bloomberg put the odds of a recession next year at 10%.
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