Issue of the week: Britain’s dark economic clouds
Has the new chancellor inherited an economy in dire straits?
The resignation of Rishi Sunak “could not have come at a worse time for the UK”, said Alex Brummer in the Daily Mail. In its latest Financial Stability Report, the Bank of England warns that the outlook has “deteriorated materially” for Britain. It blames this largely on Russia’s invasion of Ukraine, but inflation “was embedded long before the war in Europe”, and the Bank’s “sluggish response” to it is now having serious market repercussions. The pound barely shifted after Sunak’s resignation. Yet “turmoil in Downing Street” can only add to sterling’s problems. Thanks to the strength of the US dollar, the pound is at its lowest level since March 2020. Perhaps the one piece of bright news greeting incoming Chancellor Nadhim Zahawi lies in the “real world of output and jobs”. The Purchasing Managers Index (PMI) – “a good proxy for the real economy” – climbed in June, and “remains above the 50 level regarded as a recession trigger”.
Are Britain’s economic troubles really more acute than elsewhere? It certainly looks that way on the inflation front, said Mehreen Khan in The Times. With consumer prices due to peak above 11% in the autumn, “Britain is experiencing the worst bout of inflation in the developed world”. The former US Treasury Secretary, Larry Summers – who last week called on the Bank of England to raise rates more aggressively – has warned that “the wave of strike activity” in the UK could tip into a dangerous wageprice spiral, making “the risk of inflation becoming entrenched significantly greater than in other parts of the world”. To make matters worse, said DealBook in The New York Times, the country is suffering from a policy vacuum. A Government in severe crisis cannot make policy as a normal leadership would.
The current thinking among policymakers is that “the worst is over” in terms of inflation, said Juliet Samuel in The Daily Telegraph – and “we now need to worry instead about recession”. But the bigger risk, according to research by Bank of America, is “a full-blown run on sterling”. The UK’s “biggest vulnerability”, the bank points out, is “its gaping current account deficit”, which makes it dependent on foreign investors. The gloomy economic outlook for next year doesn’t help. Nor does “the robust interest rate policy” of the US Fed, which is “drawing cash away from other countries”, especially emerging markets – or those, like Britain, with “emerging-market-like currencies”. The UK authorities appear “perilously complacent” about this risk. Surely it would be better to raise rates faster now, and “accept the pain of a sharp recession”, than limp along for the next decade “on the cusp of a major catastrophe”.