UK’s problems with slow growth and rising prices look likely to worsen | Larry Elliott
ggrowth is slowing and price pressures are intensifying. Consumers are anxious and an important commodity is scarce. It was the state of the UK in the mid-1970s, when a single word was used to describe a combination of recession and rising cost of living: stagflation.
And, in a much milder form, it is the malaise that plagues the economy today. The shortage is in computer chips rather than crude oil, but the latest snapshot from IHS Markit / Cips suggests companies are once again facing supply and demand constraints.
Certainly, an incurable optimist could put a decent luster on the latest purchasing managers index. The economy is growing at a relatively healthy pace, companies are hiring more staff, and there are signs that pricing pressures are easing.
The reality is much less optimistic. Activity, according to purchasing managers, slowed for a third month and more than expected by a survey of economists. Reported incidents of production reduction through labor or material shortages are 14 times higher than usual and the highest since PMIs were first produced in 1998.
It is the problem of supply. The problem with demand is that Covid-19 has not gone away despite the warmer weather and the NHS vaccination program. The number of cases is increasing, not decreasing, which makes consumers nervous.
It’s a classic double hit. On the one hand, companies are forced to pay higher wages to fill labor shortages. On the other hand, demand begins to ease. The economy will continue to grow at a sustained pace in the third quarter of 2021, but at a much slower pace than the 4.8% seen in the second quarter.
This double whammy could easily turn into a triple whammy if the economy struggles to cope with the withdrawal of government support. Rishi Sunak has no plans to abandon his plan to end the leave program next month and sees no reason to do so, given the record job postings.
But it’s easy enough to envision a scenario in which consumers decide that eating out or going to the movies is not worth the risk, especially with companies raising their prices to cover higher labor costs. Britain’s mini-stagflation episode is likely to get worse before it gets better.
US buyout specialists prefer UK to other European countries
With a private equity bidding war for Morrisons in full swing, it was only a matter of time before other supermarkets caught the attention of buyout dealers. Sainsbury’s shares hit a seven-year high after a weekend report that US buyout specialist Apollo was reviewing it.
There are reasons why UK grocery chains are getting all this attention: they have large and lucrative property portfolios; they generate a lot of money; and they look cheap given current market valuations.
This last point applies not only to supermarkets but to UK plc as a whole. The London market is lagging behind Wall Street, and high corporate valuations in the United States mean that U.S. private equity is looking around the world for where to find bargains. Chicago-based global law firm Mayer Brown said there were 65 takeovers of UK businesses by US private equity firms in the past year, up from 37.
The weakness of the pound, reflecting the weak performance of the economy since Brexit, is one of the reasons American companies have looked to the UK rather than other European countries. Another is a shared Anglo-Saxon business model, with the UK being more open to private equity than Germany or France.
US private equity firms, according to Mayer Brown, like the UK’s flexible labor market because it makes it easy to “restructure” the workforce, and that rings true. The bidders for Morrisons were keen to dispel the idea that they saw the supermarket as ripe for cost cutting and asset stripping. But as Mandy Rice-Davies might have said: they would, right?