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How bad will the UK economy get?

Updated: Jun 22, 2022

There is little consensus currently about how weak the UK economy will get in the next year or two as a result of the prevailing high single digit inflation.

Be in no doubt: high inflation is bad. You can see in the charts below what happened to trend growth in the UK and US from the early seventies onwards as a result of the high inflation that emerged at that time. There still seems hope that today's high inflation will somehow magically go away without inflicting real pain. It won't.

Incidentally, deflation is also bad, as evidenced by the change in trend growth following the 2008/9 crisis which saw inflation turn negative in many places.

Economies can handle high inflation for a while before pain is felt. However, either monetary conditions do not get tightened in which case inflation stays high - and once consumers have maxed out their credit cards as a result of higher prices, they cut spending leading possibly to a recession. Or, they get tightened which has some impact on inflation but which also brings forward a possible recession.

Economies do not behave linearly. They are examples of complex non-linear adaptive systems. Translation: they're complicated. Economies, like the weather, often hit tipping points at which there is a sudden change in direction. After all, Wiley E. Coyote did not gradually fall off the cliff but suddenly. The tipping point came when he looked down.

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

© Chimp Investor Ltd

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