The UK is burning through cash amid the energy crunch and risks stagflation unless it pushes through these growth hurdles, Mohamed El-Erian says

·3-min read
Mohamed El-Erian
Mohamed El-ErianREUTERS/Shannon Stapleton
  • The UK risks stagflation unless it can push past these hurdles to its economic growth, according to top economist Mohamed El-Erian.

  • Hurdles included the European energy crisis and the government's flawed response to encouraging growth so far.

  • The global economy is also slowing down, which means the UK's domestic growth will be hard-pressed.

The UK is burning through cash amid Europe's energy crisis, and it risks stagflation unless it can push past several hurdles to its economic growth, according to Mohamed El-Erian.

In an op-ed for Bloomberg on Tuesday, the top economist pointed to goals of the UK's new prime minister, Liz Truss, to get a grip on the country's spiraling inflation problem, with prices hitting 40-year high last month.

But that all hinges on whether Truss can push the UK economy past four barriers that threaten to hinder its growth and send it into a stagflationary crisis, El-Erian warned, the first being the energy crisis across Europe, which has the UK burning through cash to shield itself from soaring energy prices.

So far, the UK has spent around 178 billion euros to cap heating prices and otherwise protect households from soaring energy costs, according to a Bruegel report.

That will limit household bills to just a 25% increase over the next two years instead of a 300% increase, El-Erian said. But it could spell trouble for the UK's economy growth, as the government will likely need to borrow more to keep providing aid. That could lead the Bank of England to hike rates even further, raising the risk that the central bank will end up screeching the economy to a halt.

"There is a risk that such a funding approach could aggravate complicating moves in both interest rates and the currency – both of which are already fueling stagflationary tendencies," he added, echoing BlackRock, which saw Europe tipping into a severe recession by early 2023 due the strain of the energy crisis on economic growth.

The second hurdle is the possibility that measures the UK has taken to spur growth – such as price caps and potential tax cuts on energy companies – won't be enough to rev up the economy, especially if they're not paired up with other "pro-growth" policies, El-Erian said.

"Already, there is doubt as to whether tax cuts will prove sufficient to produce sustainable household demand and business investment," he warned.

The third hurdle is the lack of regulation to encourage energy efficiency among UK households and businesses. While measures have been taken to address the soaring cost of fossil fuels, the climate change agenda has taken a backseat, which could hinder economic growth in the future.

The last hurdle is that the slowdown in the global economy, with the US, China, and the European Union being plagued with recession fears as well. That means domestic growth could be hard pressed, considering that the rest of the world is slowing down.

"The new Truss government is right to emphasize growth. The success of its specific approach will depend in large part on managing three risks that have so far remained largely unaddressed and a fourth one that is outside of its control," El-Erian warned.

Read the original article on Business Insider