How Truss can survive with luck on her side

Inflation is running out of control. The pound is in freefall. The trade deficit has blown out, the unions are calling constant strikes, gilts are wobbling and living standards are getting hammered. Probably no new prime minister has come into office facing a worse outlook than Liz Truss since James Callaghan took over from Harold Wilson almost half a century ago. It might only be a matter of time before she is forced to call in the IMF for a bailout.

But hold on. Occasionally the winds of fortune can change, and change very rapidly. Truss could get very, very lucky. How? The gas bubble, in the middle of a classic market squeeze, could burst, bringing down the cost of energy dramatically; the pound could start to strengthen again, bringing down inflation; and the Federal Reserve could start to pause its interest rate hikes, opening the door to cheaper borrowing everywhere. All of that is completely outside the control of any British prime minister. And yet, it is all perfectly plausible. With just a little luck on her side, Truss could well be in a far stronger position, at least as far as the economy is concerned, in six months’ time.

The task facing Truss, assuming as expected she takes over as prime minister next week, is so daunting that at times it is hard to see why she has campaigned so enthusiastically for the job. Boris Johnson, Theresa May and David Cameron all faced stiff challenges on moving into No10. But none of them had to deal with quite the same toxic mix of rising prices, energy shortages and a currency in freefall. Only Callaghan comes close. And for all his personable demeanour, all he managed was three years of increasingly desperate crisis management before being kicked out of office. Truss could easily suffer the same baleful fate. Elliot Hentov, head of global macro research at State Street, argued in a note yesterday that Truss was likely to have the shortest tenure of any prime minister of the last 50 years. That is the mainstream view in the City. And yet, that script is not inevitable. She could get some big breaks, and get them quite quickly. Here are three that could rescue her premiership.

First, gas prices. With Russian supplies drastically reduced, there is no question that energy is in short supply across Europe. And yet it is also true that the market has witnessed an epic short squeeze, with traders and hedge funds sending prices ever higher. We all know what happens when a bubble like that is reversed. Prices start to tumble dramatically. In fact, there were already signs of that this week, with gas prices dropping by more than 20pc in a single session (always a signal of a market that has gone haywire). Futures dropped another 17pc yesterday. Add in a mild-ish winter, and some extra LNG shipments from the Middle East, and the gas price could be back to its long-term averages very quickly. If that happens, the next adjustment to the energy price cap will be a big reduction instead of the scary increases that have been speculated about over the past week. In an instant, energy will be a lot more affordable, households won’t need to be bailed out and businesses will be operating normally again.

Next, the pound may start to strengthen. The main reason it is so weak is because the dollar has been on an epic bull run (the euro and the yen are just as weak). That may well stall this autumn and then go into reverse. If so, inflation will start to come down rapidly. At a more normal exchange rate, oil would already be relatively cheap, for example, and so would most other commodities.

Finally, the Federal Reserve may pause its interest rate hikes very soon. After all, with energy supplies secure, and with a strong currency, American inflation may soon be falling sharply. If so, the Bank of England will have cover for putting its rate hikes on hold as well.

Of course, none of that is inevitable. And, scarily for both Truss and whoever she appoints as her new chancellor, all of these hoped-for breaks are completely outside the control of the British government. There is nothing she can do that will affect the energy markets, the currency or the Fed. And yet one simple fact remains. The current crisis is mainly the result of global events, and those can change in the blink of an eye. With a few lucky breaks, Truss could find herself facing a very different economic outlook in six months – even if it will take a lot of crossed fingers and some strong nerves just to survive that long.

‘There are already signs of the bubble bursting, with gas prices falling by 20pc’