1. UK economic outlook

As we publish our Summer Economic Outlook, the UK economy may already be in recession and, with consumer price inflation close to double figures, the threat of stagflation has returned for the first time since the 1970s. Though comparisons with that period are generally overstated, the UK economy – following a decade of stagnation and Brexit – was not in a healthy position when the Covid-19 shock arrived: the ‘lockdown recession’ actually began with a small contraction in the fourth quarter of 2019. When the pandemic first arrived, fiscal and monetary policy responded appropriately to protect the balance sheets of both businesses and households but, when it became clear that the economy was emerging from the shadow of the pandemic, monetary policy was too slow to begin normalisation and failed to respond to the first round of inflation, which was generated by supply chain disruptions in 2021. The Monetary Policy Committee (MPC) of the Bank of England was not aided by fiscal policy, which switched too quickly to contractionary, and – not for the first time in recent history – left the monetary authorities reluctant to raise rates with demand still fragile. This initial rise in prices was then followed by Russia’s February invasion of Ukraine, which drove energy prices yet higher and disrupted the supply of food items, experienced in the UK as a terms-of-trade shock. Because of the Ofgem energy price cap, in the UK this led to a large rise in inflation from April in particular (see Figure 1.1).