Rishi Sunak, Britain’s third prime minister in seven weeks, will face the enormous challenge of forging stability after a period of historic political and financial turmoil. But his other job — waiting for the country to recover — can be daunting.
The former finance minister won the race to replace Liz Truss, her former rival who would become the shortest-serving prime minister in British history. He will officially participate when appointed by King Charles III.
The pound rose against the US dollar as Sunak’s path to power unraveled with the withdrawal of rival Boris Johnson on Monday, but last fell 0.2% to below $ 1.128. The yield on the UK 10-year bond, which moves against prices, fell to 3.82%.
Sunak campaigned for jobs over the summer with a promise to help households deal with rising costs, which are causing many to cut costs. He said he would cut taxes, but only once did pressure on prices ease.
But the economic outlook has worsened significantly since then – mainly because of the market turmoil unleashed by Truss’s now-abandoned plan to cut taxes as quickly as possible and boost government borrowing. .
A closely watched measure of economic activity fell to a 21-month low in October. S&P Global, which monitors the data, said it confirmed that the United Kingdom is in recession.
“Growing political and economic uncertainty has caused business to expand at a rate not seen since the global financial crisis of 2009, if not included in months of pandemic shutdowns,” said Chris Williamson, chief economist at S&P Global Market Intelligence.
If Truss’ dangerous tax plan is proven, any economic stimulus other than immediate support for energy bills would be a non-starter for Sunak.
“A key focus for the next prime minister and his chosen chancellor should be fiscal responsibility,” said Carl Emmerson, deputy director of the Institute for Fiscal Studies, in a statement. “We need a credible plan to ensure that government debt can be expected to fall in the short term.”
Although the Bank of England’s top official said last week that investors could pay for too much interest rate hikes, the central bank is expected to remain tight-lipped over time. short of his campaign to control the cost of living.
The Bank of England estimated last month that the UK economy is already in recession. There is growing evidence to support this view. The country’s output fell 0.3% in August, after rising just 0.1% in July.
A government report released on Friday showed retail sales fell 1.4% in September, a worse-than-expected decline. And consumer confidence is near its worst level on record as inflation returns to a 40-year high.
Dean Turner, an economist at UBS Wealth Management, called the spending outlook “very negative, to say the least.” The big question now, he says, is how long the contraction will last and how deep it will go.
The picture of the UK’s financial position also darkened with the release of data on Friday showing that Britain’s government borrowed a net 20 billion ($22 billion) in September, £5.2 billion ($5.7 billion) more than the country’s agency expected.
“Weak retail sales and an overshoot in the Office for Responsibility’s public borrowing forecast in March will not make the next prime minister’s job of navigating the economy any easier.” through the cost of living crisis, the cost of the credit crisis and the cost of the crisis of confidence,” said Ruth Gregory, senior economist at Capital Economics, in the notice to the customer.
Investors and economists hope that the revised economic plan outlined by the current finance minister Jeremy Hunt will have to stay.
Last week, Hunt — just days into the job — announced the rollback of nearly all taxes in Truss’s original “growth plan,” which investors rejected.
Citing the new commitment to control the country’s debt, Hunt also said that the government will limit the price of energy around the world until April. Support beyond that will cost taxpayers “far more than planned,” he added.
“Whoever becomes PM – and even if they decide to change the chancellor – it seems to me that the financial path is really set in stone, because the market will not tolerate anything but -not what’s on the table,” Turner said.
This could help keep financial markets under control, although firm assurances and more details on the budget plan are expected as bond markets across the board react. “The signs of trouble are global,” said James Athey, chief investment officer at asset manager Abrdn.
“It holds the pause button on the participation of international investors,” Athey said.
There is also uncertainty about the Bank of England’s next move. Ben Broadbent, deputy director of monetary policy, warned last Thursday that investors may have been ahead of the curve on rate hikes amid the recent turmoil.
“The official interest rate should rise as much as the current financial market price,” he said in a speech.
The central bank is still expected to be tight at its November and December meetings. If the economy slows down significantly in the coming years, it may backfire later. That is, if the government withdraws support from the energy bill in April, it could cause inflationary pressure – again complicating the calculation.
“Let’s be honest, we don’t know what energy prices will be in April, so we don’t know what the impact on household budgets will be,” Turner said.
This allows investors to think longer, and economists waiting to update their forecasts.
“Clarity and confidence, unfortunately, are all missing,” Athey said.