Pound dips as Rishi Sunak prepares to confront economic challenges


London
CNN Business

Rishi Sunak, Britain’s third prime minister in seven weeks, will face the huge challenge of spreading stability after a period of historic political and financial market chaos. But his other job — shepherding the country through a recession — is poised to be just as daunting.

The former finance minister won the race to replace Liz Truss, his first opponent who is set to be the shortest prime minister in British history. He will officially step into the role once appointed by King Charles III.

The point was raised against the US With the withdrawal of rival Boris Johnson earlier Monday, but was last down 0.2% to below $1.128. Yields on benchmark 10-year UK bonds, which move inversely to prices, fell to 3.82%.

Sunak campaigned for the job over the summer with promises to help households tackle the rising cost of living, which is causing many to pull back on spending. He said he would cut taxes, but only once price pressure eased.

Still, the economic outlook has deteriorated sharply since then – not least because of the market turmoil unleashed by Truss’ now-abandoned plan to cut taxes as soon as possible and boost government borrowing.

A closely watched measure of economic activity dropped to a 21-month low in October. S&P Global, which tracks the data, said it effectively confirms the United Kingdom is in recession.

“The heightened political and economic uncertainty has caused business activity to fall at a rate not seen since the global financial crisis in 2009, if pandemic lockdown months are excluded,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Also Read :  COP27 delivers climate fund breakthrough at cost of progress on emissions

As Truss’ disastrous tax cut plan proved, any economic stimulus beyond immediate support for energy bills could be a nonstarter for Sunak.

Carl Emerson, deputy director of the Institute for Fiscal Studies, said in a statement, “A key focus for the next prime minister and their chosen chancellor must be fiscal responsibility. “We need a credible plan to ensure that government debt can be expected to fall Over the medium term.”

Although one top Bank of England official indicated last week that investors may be pricing in too many interest rate hikes, the central bank is expected to remain tough in the near term in its campaign to get inflation under control.

The Bank of England predicted last month that the UK economy is already in recession. Evidence to support this view is growing. The country’s output contracted by 0.3% in August, following an expansion of just 0.1% in July.

A government report released Friday showed retail sales fell 1.4% in September, a worse-than-expected drop. And consumer confidence is near its worst level on record as inflation is back at a 40-year high.

Dean Turner, an economist at UBS Wealth Management, called the spending outlook “pretty bleak, to say the least.” The main questions now, he said, are how long a contraction lasts and how deep it gets.

Also Read :  Seizing the transformative power of digital and social economy: the OSCE Regional Ideathon

The picture of the United Kingdom’s financial position was also darkened with the release of data on Friday, which showed that Britain’s government stole a net of 20 billion ($22 billion) in September, 5.2 billion ($5.7 billion) more As the country’s financial watchdog expected.

“The weakness in retail sales and overshoot of the Office for Budget Responsibility’s March public borrowing forecast will not make the next prime minister’s job easier to navigate the economy through the cost of living crisis, the cost of borrowing crisis and the cost of credibility crisis .”, Ruth Gregory, senior UK economist at Capital Economics, said in a note to clients.

Investors and economists expect the revamped economic plan outlined by current finance minister Jeremy Hunt to remain intact.

Last week, Hunt – only days in the job itself – announced the return of almost all tax cuts in Truss’ original “growth plan,” which was rejected by investors.

Citing a renewed commitment to control the country’s debts, Hunt also said that the government will universally cap energy prices only until April. Support beyond then will cost taxpayers “significantly less than planned,” he added.

“Whoever becomes prime minister – and even if they decide to change the chancellor – I think the fiscal road is very rocky, because the markets will not tolerate anything other than what is on the table,” Turner said.

Also Read :  A house price slump is coming. Rising unemployment could make it much worse

That could help keep financial markets in check, although firm assurances and more detail on budget plans would be welcome at a time when bond markets around the world are showing signs of strain, said James Athey, investment director at Abrdn, an asset manager.

“It just keeps the pause button pressed on international investor engagement,” 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 been premature in projecting rate hikes amid the recent chaos.

“Whether the official interest rates must rise quite as much as current prices in financial markets remains to be seen,” he said in a speech.

The central bank is still expected to be very dovish at its November and December meetings. If the economy demands sharply next year, it can withdraw later. That said, if the government withdraws some support for energy bills in April, that could reignite inflationary pressures – again complicating the calculus.

“Let’s be honest, we have no idea what the energy price will be in April, so we have no idea what the effect will be on household budgets,” Turner said.

This leaves investors guessing for more, and economists waiting to revise their forecasts.

“Clarity and certainty, unfortunately, are all too absent,” Ahey said.

Source

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Articles

Back to top button