Sunak receives UK with an economy on its knees

The UK is a great country, but there is no doubt that we face a profound economic challenge… We need stability and unity, and my top priority will be to unite our party and our country.”

Rishi Sunak, the new Prime Minister of the United Kingdom.

Rishi Sunak, the new prime minister of the United Kingdom, who takes office this Tuesday, inherits an economy on its knees due to skyrocketing energy prices and interest rates, the morale of consumers and businesses on the ground and the distrust of the markets .

The former Minister of Finance during the term of Boris Johnson and who previously headed the Treasury and worked for investment funds at Goldman Sachs, comes from the business world, which he will now try to reassure.

Danni Hewson, an analyst at AJ Bell, noted that Sunak has the markets on his side as they expect him to stabilize the economy and political situation.

But the task is announced “dantesque” according to Susannah Streeter, an analyst at Hargreaves Lansdown.

For months, the country has chained adversity. The pandemic, the impact of Brexit (effective from January 2021), the war in Ukraine, the brutal inflation of 10% and its effects on the increase in poverty with millions of citizens overwhelmed by bills.

Added to this is the storm over the markets generated by the brief tenure of Liz Truss and the mini-budget of her finance minister, Kwasi Kwarteng.

These measures, which included tax cuts and aid for energy bills, not encrypted and financed by loans on the markets, caused investors to flee.

This was exactly what Rishi Sunak predicted during his lost prime ministerial campaign against Truss, when he advocated just the opposite: a return to budgetary orthodoxy.

Days before his resignation, Truss tried to salvage the situation by removing Kwasi Kwarteng and replacing him with Jeremy Hunt.

Hunt annulled almost all of the tax cuts, reduced energy aid and announced “difficult decisions.”

Hunt, who is not yet known if Sunak will keep him as finance minister, is working on a medium-term budget for October 31, where he foresees cuts in public spending and possible tax increases. With or without Hunt, the specter of a return to austerity hangs over Britain.

The country’s economic data is very worrying: inflation at 10%, the highest in 40 years, the GDP fell 0.3% in August and the composite PMI indicator (services and factories) contracted this month with 47.2 points.

little room for maneuver

Investors welcomed Sunak but are likely to give him little room to swerve from spending restraint and tax hikes.

Government bond markets seemed to welcome Sunak’s rise, with the benchmark 10-year bond yield falling 30 basis points to 3.75 percent yesterday.

Paul Donovan, chief economist at UBS Wealth Management, said falling gilt yields in recent days showed markets no longer charge the UK that “credibility risk premium”.

Donovan notes that the chaos of the past month means that Sunak will have little room to make bold decisions, as long as he doesn’t risk the wrath of the market.