Spectre of stagflation rears up over UK economy as house builders feel the pain of high inflation and lower growth

by | Mar 23, 2022

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

“The spectre of stagflation has reared up over the UK economy with the growth forecast revised sharply downwards while higher prices are set to be entrenched for many months to come. The invasion of Ukraine and soaring commodity prices have upended previous forecasts from the UK’s independent Office for Budget Responsibility, which now expects the economy to grow at a much slower pace of 3.8% this year, instead of 6%, and inflation to come in at an average of 7.4%. It means consumers and businesses will have to buckle up to withstand a bout of serious price rises in the next few months, as the commodity chaos unleashed in recent weeks feeds through. The latest reading today for February came in higher than expected hitting 6.2%, and it’s clear the financial pain of higher prices is going to get a lot worse before it gets better. This unsettling forecast saw the pound reverse earlier gains and fall lower, back to under 1.32 against the dollar, while the FTSE 100 lost steam, sinking into the red.

House builders sank even further into negative territory as a toxic mix of higher interest rates and soaring energy bills are expected to cool down the hot housing market. With mortgage costs set to rise, new buyers are likely to be less inclined to overstretch themselves, and while for now order books have remained strong, there are worries of weakness ahead, with input costs also rising. Persimmon, Barratt Developments and Taylor Wimpey were all around 3% lower after the statement.

The war in Ukraine continues to weigh on airline stocks, with fears a protracted conflict will hurt the confidence of the travelling public. Worries about fuel costs are also mounting, given there is little respite in sight for a reduction in the price of energy. Oil prices are careering upwards again, with Brent crude rising by around 5% today, hitting $120 dollars a barrel. That’s led to steady and sustained gains for energy giants BP and Shell, after demands for a windfall tax on their profits were batted away by the Chancellor Rishi Sunak, helping push them to the top of the FTSE 100.”

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