– The challenges of Rishi Sunak, new British Prime Minister
Soaring energy and interest rates, consumer and business morale at half mast, mistrust of the markets: the new leader of the country inherits a British economy on its knees and with a very deteriorated image among investors.
Boris Johnson’s former Chancellor of the Exchequer, who previously headed the British Treasury, worked for investment funds or at Goldman Sachs, comes from the business world that he will have to work to reassure.
For Danni Hewson, analyst at AJ Bell, he “has the markets on his side” because they “hope he will stabilize the economy and the political situation”.
And in fact as soon as it was announced that Boris Johnson was abandoning his desire to return to Downing Street, and that Rishi Sunak was now the big favorite, the City breathed a sigh of relief.
British debt borrowing rates eased, the 30-year rate fell to 3.886% on Monday against 4.06% on Friday, even if it remains significantly higher than at the end of 2021 when it was trading at around 1%.
The pound sterling was stable at 1.1301 dollars around 1300 GMT.
But “the task promises to be daunting”, for Susannah Streeter, an analyst at Hargreaves Lansdown.
For months, the country has been going through hardships. The pandemic, the impact of Brexit which took effect in January 2021, the war in Ukraine, soaring energy and food costs, and its corollary rising poverty with millions of Britons strangled by bills .
To this was added the political chaos, between the scandals of the government of Boris Johnson and the storm on the markets caused by the brief passage of Liz Truss in Downing Street and the “mini-budget” of his still Chancellor of the Exchequer Kwasi Kwarteng.
These measures of a colossal scale combining tax cuts and aid for energy bills, unquantified and which were to be financed by borrowing on the markets, scared investors away.
The pound plunged to an all-time low, borrowing rates on UK debt soared to a 20-year high at a speed that raised fears of a downward spiral and forced the Bank of England to intervene to avoid a financial crisis.
Exactly what Rishi Sunak had predicted in his lost campaign against Liz Truss to replace Boris Johnson at Downing Street, when he advocated the exact opposite: a return to budgetary orthodoxy.
A few days before the debacle of her government, Liz Truss had tried to save the furniture by dismissing Kwasi Kwarteng, replaced by Jeremy Hunt.
The latter immediately slashed almost all of the tax cuts, greatly reduced energy aid, and announced that “difficult decisions are to come”.
He is working on a medium-term budgetary plan for October 31, which should announce painful cuts in public spending and possible tax increases.
The latter could in particular target the energy and banking sectors, which have benefited greatly from the surge in energy prices and interest rates in the wake of Russia’s invasion of Ukraine.
It remains to be seen whether Jeremy Hunt will be retained in Finance, but the specter of a return to austerity now hangs over the UK, a pill that could be bitter to swallow from the wealthy Rishi Sunak, whose wife is heir to one of India’s greatest fortunes.
In the meantime, the economic lights are already red: inflation at 10% is the highest in the G7 and at the top for 40 years. GDP fell in August and the leading PMI indicator showed further deterioration in October as analysts believe the country is headed for recession. Retail sales fell in August, showing that inflation is starting to eat away at consumers’ wallets.
Only the unemployment rate remains at its lowest for 50 years, but this is largely due to a lack of workers and an exit of job seekers from the labor market.
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