Can Sunak cure the crisis and safeguard growth?30 Oct 2022 12:27
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The destructive month-long Truss tornado has passed, tamed in three stages. First, through the sacking of the chancellor and the changing of tack on tax cuts, followed in short order by the prime minister’s own resignation. The appointment this week of Rishi Sunak, the man who had predicted how her policies would play out, as her replacement was the final piece in restoring calmness across markets and shoring up the UK’s credibility.
There’s a lot resting on his shoulders. Sunak may have steered the economy through a pandemic and begun the job of manoeuvring it back onto a “normal” footing, but the problems he faces at Number 10 are of a different order thanks to soaring debt, the ongoing inflation problem, and the certainty that the UK is slipping into recession. From the UK’s third prime minister this year, businesses and households will want support as they struggle through what Sunak described as a “profound economic crisis”, while markets and policymakers will demand a strategy that delivers stability in the face of turbulence and tough challenges. Above all, Sunak cannot ignore the critical need to nurture growth.
Inflation remains in double figures (helped by Putin’s war), and continues to display resistance to monetary medicine. That’s the chief cause of stress for businesses that face rising costs and waning appetite from squeezed consumers who themselves face higher food and energy costs. The pressure on companies is reflected in the rising rate of profit warnings - EY Parthenon reports that UK listed companies have posted the highest number of Q3 profit warnings since 2008, with a 69 per cent increase on the same period last year. Over half of the warnings came from consumer-facing sectors and 57 per cent were prompted by rising costs.
Capital Economics warns that CPI inflation stuck at 10 per cent for a year (it expects the ending of the energy bill support next April to prolong double digit inflation) and interest rates rising to 5 per cent will be enough to trigger a recession that will cause real GDP to decline peak-to-trough by 2 per cent. That’s harsher than previously expected and it says unemployment could rise from 3.5 to 5.5 per cent in early 2024.
No-one doubts that getting debt down will be the PM’s priority. Not only is this a core tenet for Sunak - he has reiterated his view that he does not want to leave a legacy of debt for future generations to settle “because we were too weak to pay for it ourselves” - but doing so will have a cascade effect as it reassures markets and cuts servicing costs. Interest payments on government debt hit £7.7bn in September, an increase of £2.5bn on September 2021. But the hole in the public finances has already shrunk - by as much as £10bn - thanks to the calming of markets.
IC - EDITOR
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