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The 16-year-long party for the UK economy has well and truly ended and the hangover is likely to be a particularly unpleasant one. Rarely in recent times have so many statistics, reports and surveys been so disappointing or gloomy at the same time.

Last autumn’s credit crunch has brought with it a discouraging combination of slowing growth and rising inflation, a weakening exchange rate and deteriorating confidence. The virtuous circles that we have been used to for so long have been replaced with vicious circles. Only the Chancellor now seems to believe that the UK economy will post reasonable growth this year and next. The implication for the printing industry is clear: it’s going to get tougher.

Growth in the first quarter of the year slowed to 0.4%, insufficient to prevent unemployment from rising. Normally, when growth slows inflation slows too because demand is subsiding, but not this time. Global factors are overwhelming national ones. The economies of China, India and most other countries are growing, putting pressure on resources. For a variety of reasons, including the world’s reaction to climate change, food prices have soared – global food prices have risen 83% in the past three years – and oil prices continue to rise, having touched $135 a barrel recently. For as long as demand remains strong and there are question marks about supply, both food and oil prices will continue to rise.

Inflation jump
The knock-on effects for British businesses and consumers are self-evident. Disposable incomes are being squeezed by higher prices for utilities, at the petrol pumps and in the supermarkets. Retail and consumer spending growth – for so long the engine of UK economic growth – is slowing.

Inflation on the consumer price index shot up from 2.5% in March to 3% in April, the sharpest jump for nearly six years. It is almost inevitable that this month the Governor of the Bank of England will have to write his second letter to the Chancellor explaining why inflation has risen more than one percentage point above target.

When Mervyn King last had to write such a letter in March 2007 he was confident that inflation would soon fall; it did. This time is different. The Bank of England’s recent Inflation Report suggests that inflation will peak at 3.7% later this year. For once, the Bank might be being too optimistic. The wider retail price index has gone up from 3.8% to 4.2%. In these circumstances it is imperative that print firms try to pass on cost increases to their customers.

The emergence of above-target inflation has been exacerbated by sterling’s weakness on foreign exchange markets. Sterling has fallen from about €1.45 last summer to just €1.24 this year, a depreciation of more than 14%.

In an ideal world, the Monetary Policy Committee would have no qualms about cutting interest rates to support economic growth. However, with inflation above target and set to go higher, the MPC has one hand, if not both hands, tied behind its back. Interest rates, currently at 5%, now look set to remain at this relatively high level for some time to come.

Despite the Bank of England injecting funds into the banking system, the liquidity squeeze continues unabated. The spread between LIBOR, a key interest rate, and official rates remains uncomfortably wide, reflecting a lack of confidence in financial markets. The housing market is suffering, with prices now down year-on-year for the first time since 1996 and mortgage approvals falling rapidly, to their lowest level since 1992. There really is very little good news around.

The party is also over for me. After more than eight years and almost 100 columns for PrintWeek reporting on the ups and downs of economic life, I am bowing out.

David Ross is an independent economics consultant running his own business, Ross Economics and Editorial Services Ltd. Contact him at: dh.ross@btinternet.com