Rishi Sunak, Britain’s third prime minister in seven weeks, will face the enormous challenge of projecting stability after a historic period of political and financial market turmoil. But his other task – shepherding the country through the recession – is poised to be equally difficult.
The former finance minister has won the race to replace Liz Truss, his first opponent, who became the shortest serving prime minister in British history. He will officially step into the role once appointed by King Charles III.
Pound Sterling Rises Against US Dollar As Sunak’s Road To Power Is Cleared with rival Boris Johnson’s retreat earlier on Monday, but ended up falling 0.2% below $1,128. Yields on the benchmark 10-year UK bond, which are priced differently, fell to 3.82%.
Sunak campaigned for the summer job on a promise to help households deal with the rising cost of living, which is forcing many to cut back on spending. He said he would cut taxes, but only once the price pressure eases.
However, the economic outlook has deteriorated significantly since then – especially due to the market turmoil unleashed by Truss’ plan to cut taxes as soon as possible and boost government borrowing.
A closely watched gauge of economic activity fell to a 21-month low in October. S&P Global, which tracks data, said it effectively confirmed the UK was in a recession. .
“Increasing political and economic uncertainty has caused business activity to decline at a rate not seen since the global financial crisis,” said Chris Williamson, chief economist at S&P Global Market Intelligence. 2009, if you don’t take into account the months of pandemic stalemate.”
As Truss’ disastrous tax-cutting scheme demonstrates, any economic stimulus beyond immediate support for energy bills could prove unwise for Sunak.
“The primary focus of the next Prime Minister and their chosen Prime Minister should be on financial responsibility,” Carl Emmerson, deputy director of the Institute for Fiscal Studies, said in a statement. “We need a credible plan to ensure that government debt can be reduced in the medium term.”
Although a top Bank of England official last week indicated that investors may be pricing in too many rate hikes, the central bank is expected to remain firm. in the coming time in the inflation control campaign.
The Bank of England last month forecast that the UK economy was in recession. Evidence to support that view is mounting. The country’s output fell 0.3 percent in August, after rising only 0.1 percent 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 on record as inflation returns to a 40-year high.
Dean Turner, an economist at UBS Wealth Management, called the spending outlook “pretty dire, to say the least”. The main questions now, he said, are how long a contraction lasts and how deep it becomes.
The picture for the UK’s finances also darkened with the release of data on Friday showing that the UK government borrowed a net 20 billion pounds ($22 billion) in September, more than 5 £0.2 billion ($5.7 billion) more than expected by the country’s financial watchdog.
“The weakness in retail sales and the Office of Budget Responsibility’s March public debt overshoot will not make the Prime Minister’s next task any easier to navigate the economy beyond its expectations. through the cost of living crisis, the cost of borrowing crisis and the cost of credit crunch. “, Ruth Gregory, senior UK economist at Capital Economics, said in a note to clients.
Investors and economists expect the improved economic plan outlined by current Treasury Secretary Jeremy Hunt will remain intact.
Last week, Hunt – only a few days into the job – announced the rollback of nearly all of the tax cuts in Truss’ original “growth plan”, which was rejected by investors. .
Citing a renewed commitment to controlling the country’s debts, Hunt also said the government would only cap energy prices globally until April. Subsequent support would cost taxpayers “significantly less than planned,” he added.
“Whoever becomes Prime Minister – and even if they decide to change Prime Minister – it seems to me that the financial path is pretty much set, because the market won’t accept anything. nothing but what’s on the table,” Turner said.
That could help keep financial markets in check, said James Athey, chief investment officer at Abrdn, an asset manager. The book will be welcomed at a time when bond markets around the world are showing signs of stress, said James Athey, chief investment officer at Abrdn, an asset manager.
“It just keeps hitting the pause button on international investor participation,” Athey said.
There is also some ambiguity about the Bank of England’s next moves. Ben Broadbent, deputy director of monetary policy, warned last Thursday that investors may have gone ahead in projecting a rate hike amid the recent turmoil.
“Whether official interest rates should rise as much as they are currently in financial markets remains to be seen,” he said in a statement.
The central bank will still be very tough in its November and December meetings. If economic growth slows sharply next year, then it could pull back. That said, if the government withdraws some support for energy bills in April, that could extend inflationary pressures – again complicating the calculation.
“Honestly, we don’t know what energy prices will look like in April, so we don’t know what the impact will be on household budgets,” Turner said.
That left investors guessing longer and economists waiting to revise their forecasts.
“Unfortunately, clarity and certainty are both too absent,” Athey said.