The UK faces international humiliation over its economy
IT is rare for the International Monetary Fund to pass comment on the economy of a developed, industrialised country. However so serious has been the response to the Liz Truss and Kwazi Kwarteng tax cutting budget that the IMF felt forced to comment on the risks to global economic stability.
The UK has not faced IMF humiliation on this scale since 1976, when Denis Healey, as Chancellor in the Jim Callaghan government, had to go cap in hand to the IMF for a financial bail out. Truss has had the shortest possible political honeymoon. The U-turn her government now faces is unprecedented and one never delivered without someone falling on their sword to accept the blame.
Truss was warned in clear terms by every economist in and outside government of the consequences of tax cutting while increasing spending. She ignored those warnings, falling into the trap of believing her own PR to get elected. If there is a political price to be paid, and there should be, she and Kwarteng fully deserve to pick up the bill.
The odds on Truss leading her party into a 2024 general election have shortened dramatically. Even with a U-turn, the damage is done. International confidence has been damaged and it will be a slow climb back for sterling; inflation has not been brought under control and we face higher interest rates and an inevitable collapse in house prices as people struggle to secure and pay mortgages.
Many in the Conservative party must now be wishing they had voted for the steadier economic hand of Rishi Sunak, but they went for style over substance. We will now all pay for their decision, via higher interest rates for the Truss take on economics, built on being different by ignoring advice.
Higher interest rates and weak sterling are now inevitable. Economic theory – something Truss ignores – holds that a weak currency is good for exports and bad for imports. The problem for the UK is that it is highly dependent on imports and the retail sector. This is also a problem for agriculture and already high input costs. Many are priced in US dollars, or made from inputs priced in that currency, which is why the weakness of sterling will drive food price inflation. That is why an angry and frustrated Bank of England has put a shot across the government’s bows by making clear, regardless of the political consequences, that it will take whatever interest rate action is necessary to stabilise the economy.
This will be bad for all businesses, but traditionally in inflationary times farming is not a bad place to be. It is stable, meaning it avoids the booms and slumps of other sectors; its main asset – land – is less volatile than commercial property or housing; it produces a product for which demand is constant regardless of economic fortunes.
Agriculture may gain marginally from imported food becoming more expensive, but with export opportunities hit by Brexit and the global food crisis, gains on that side are more limited than they would have been in the past.
Farming will ride out this storm better than most, but like other businesses it has every right to criticise politicians who chose to ignore advice, to wreak havoc for the UK economy. It was also a decision that undermined their party’s image as competent managers of the economy.
The reaction to UK economic decisions is proof we now operate in a global environment. This extends to agriculture and a recent report from an organisation called ETC (Action on Erosion, Technology and Concentration) that describes itself as committed to ‘eco-justice’ noted the intensification of the agricultural supply chain, where two companies now control 40% of the commercial seed market, compared to ten 25 years ago
On the trading side, the group says just ten commodity traders dominate the global market in agricultural products and food – and have enjoyed surging profits. The ETC report also reveals the growing dominance of Chinese businesses, with the state-owned Chinese trader, Cofco, now second only to Cargill in terms of sales.
The report also cites the growing number of well known agri-supply businesses that are majority or minority owned by Chinese companies, and examples of Middle East businesses taking strategic share ownership in agricultural companies.
‘Many in the Conservative party must now be wishing they had voted for the steadier economic hand of Rishi Sunak, but they went for style over substance. We will now all pay for their decision, via higher interest rates for the Truss take on economics, built on being different by ignoring advice’