The UK economy: What will happen after the crisis hits?

CNN Business

There was good news and bad news in Friday’s revised data on the UK economy. In the second quarter of the year, instead of shrinking as previously estimated, it grew marginally.

But the latest update from the Office for National Statistics also showed that the UK is the only G7 economy not fully recovering from the pandemic, with GDP still 0.2% lower than at the start of 2020. And according to the Bank of England, the economy is likely to shrink again, with inflation reaching 11%.

“The main one [in Friday’s data] The UK has struggled to grow and faces a deeper recession on the way, and today’s revision does not change that,” said Craig Erlam, chief market analyst at Oanda. .

Given the crisis sparked by Prime Minister Liz Truss’s decision last week to unveil huge unfunded tax cuts alongside a massive package of energy subsidies, recovery may take a long time. This gamble spooked financial markets and raised borrowing costs for governments, businesses and households.

“You have all these things coming together that are against the government’s goals of higher growth and lower inflation,” Mohamed El-Erian, a bond market expert and adviser to Allianz, told CNN earlier this week. “I say again, the situation was not good at all. Now the problems have increased.”

Emergency intervention by the Bank of England on Wednesday calmed markets and prevented some pension funds from collapsing. But Truss’ plan to boost growth has backfired, with investors now expecting the central bank to raise interest rates by 1.25% or even 1.5% by November 2 to offset the inflationary impact.

It is not clear what will happen next. Truss and his finance minister, Kwasi Kwarteng, insisted on Thursday that they would stick to their plans, but they have a very narrow window – perhaps as little as two weeks – to convince investors that the country’s finances can be trusted. The Bank of England’s emergency bond purchase is due to end on October 14.

Truss and Kwarteng, who spent the summer insulting economic orthodoxy and, in the words of former central bank chief Mark Carney, “teasing” some of the UK’s most important institutions, met on Friday with one of those key players, the Office for Budget Responsibility.

The OBR provides an independent assessment of the impact of government budgets on borrowing and growth. Truss and Kwarteng declined last Friday’s offer to present a draft analysis of the financial bombshell.

Mel Stride, a senior Conservative MP for Truss, said the OBR would deliver a very worrying message on Friday.

“I strongly suspect that this circle will not be squared,” Stride told the BBC.

With high inflation and a tight labor market, promising unfunded big tax cuts and expecting reforms to generate growth to pay for them won’t work.

“So it’s going to have to be rethought, and it’s going to be a very difficult conversation,” Stride said.

The OBR said after the meeting that it would deliver its preliminary forecasts to Kvarteng on 7 October. The Treasury said it would publish the forecast alongside its medium-term fiscal plan on November 23, resisting calls from lawmakers to release it as soon as possible. .

The big problem for the UK government is that it is stuck with an electorate increasingly angry about the rising cost of mortgages as it has to calm the markets.

Mojtaba Rahman and Jens Larson at political risk consultancy Eurasia Group previously wrote that “Increasing, delaying or abandoning the tax cuts will be avoided at all costs by Truss, as such a change would be humiliating and would make him look like a lame-duck prime minister.” can”. this week.

The only alternative left to balance the books would be to cut government spending, and that will be just as politically difficult as a recession looms, with public services under huge strain and a restive workforce showing a willingness to strike in large numbers over pay.

The opinion polls for the conservative party have fallen. The British polling agency Survation this week recorded the largest lead of the opposition Labor Party over the ruling Conservatives – 21 points.

The September 28-29 poll found 49% of respondents said they would vote Labor if an election were held tomorrow, up six points from September 5, the day before Truss took office. The Conservative Party dropped 5 points to 28%.

A separate poll by IpsosUK, also released on September 29, showed Labor has a clear lead over the Conservatives on economic policies, the management of taxes and public spending and the cost of living crisis.

—Jorge Engels, Chris Liakos, Livvy Doherty, Dan Wright, Jorge Engels and Morgan Povey contributed to this article.

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