Liz Truss won the bitter race to succeed Boris Johnson as UK prime minister and will take power with the country facing brutal economic headwinds that threaten to plunge millions of Britons into poverty this winter. Liz Truss is set to become UK prime minister this week with her plan to “turbo-charge” the economy by slashing taxes already worrying investors amid double-digit inflation. She would take office after declaring a willingness to run up the budget deficit just as the Bank of England is raising interest rates and selling its own holdings of government bonds. She also has indicated she will review the central bank’s mandate.
Truss inherits a forbidding in-tray, with the UK facing surging inflation, a potential recession, and a record squeeze on living standards spurred by soaring energy prices.
These are the most prominent economic challenges that Liz is facing
- Inflation
Inflation is at 10.1%, Last month the BOE unleashed its biggest interest-rate hike in 27 years and warned the UK is heading for more than a year of recession. It sees inflation peaking at more than 13%. Economists at Goldman Sachs Group Inc. warn it could top 22% if natural gas prices remain elevated in the coming months. Investors are betting interest rates rise to 4.75% by May, threatening misery for mortgage borrowers more familiar with rates below 1%.
Liz Truss’s economic plan would fuel inflation and prompt quicker interest rate increases from the Bank of England a poll of economists showed. Patrick Minford, an economist advising Truss, told the Times newspaper that tax cuts would boost the economy, and interest rates should probably rise to a more “normal” level of around 7%. That’s well above the BOE’s current benchmark lending rate, which now stands at 1.75%, the highest since 2009.
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- British Pound Weakness
The pound is down about 15% this year versus the dollar, just posted its worst monthly performance since the 2016 Brexit vote. The pound rose relative to most major currencies following the announcing of Liz truss winning and is 1.35% higher against the dollar, analysts surveyed by Bloomberg expect it to climb to $1.19 by March 2023.
“The key to whether or not the bounce can be sustained is the government’s credibility in costing the plan and avoiding a further larger blowout in the fiscal deficit,” said David Forrester, senior FX strategist at Credit Agricole CIB’s Hong Kong branch.
- Energy Criss
Energy bills in the UK were due to jump 80% from October to £3,548 a year for the average household, forcing many poorer families to choose between heating their homes and other basics About 24 million British households will be paying nearly three times more for energy this winter than they did a year ago. The regulated price cap for customers on variable tariffs will jump from October 1 to a level 178% higher than last winter, because soaring prices on the wholesale energy markets are forcing suppliers to pass on costs to consumers.
Prime Minister Liz Truss has drafted plans to fix annual electricity and gas bills for a typical UK household at or below the current level of £1,971 ($2,300). The policy could cost as much as £130 billion over the next 18 months according to policy documents seen by Bloomberg.
A side-effect of freezing energy bills would be the impact on broader inflation, which is already five times higher than the Bank of England’s 2% target. According to the central bank, energy accounts for “more than half of the overshoot.”
- Cost of living increase
Britain is already experiencing the biggest fall in real pay since 1977, and a tough winter looms as energy bills hit £500 a month. Real wages adjusted for inflation fell 3% in the second quarter, the sharpest pace on record. Consumer price growth broke into double digits last month for the first time since 1982.
Truss has vowed to help Britons by scrapping a 1.25 percentage point uplift in National Insurance, a payroll tax, and slashing green levies from energy bills, saving an annual £150 per household. As well as help for households, measures could include a business rates cut for small- and medium-sized businesses, which aren’t protected by a regulatory price cap on domestic energy bills and have been calling for assistance.
A side-effect of freezing energy bills would be the impact on broader inflation, which is already five times higher than the Bank of England’s 2% target. According to the central bank, energy accounts for “more than half of the overshoot.”
- UK Economy
The business lobby group has suggested that the country is already in the midst of a recession. A decline in household spending and real wages has triggered a swathe of strikes across sectors as a cost-of-living crisis starts to bite.
The mid-cap FTSE 250 index whose member companies are heavily dependent on the domestic economy is on course for its biggest-ever annual underperformance versus the exporter-based FTSE 100. That’s as the blue-chip FTSE 100 continues to be supported by mining and energy firms that are getting a windfall from booming commodities markets, as well as exporters who benefit from the sterling’s slide. FTSE 250 is down 21% versus the FTSE 100’s 1.9% decline. The FTSE 250 is on course for its biggest ever annual underperformance versus the exporter-based FTSE 100.
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“The FTSE 250 does clearly have its challenges,” Russ Mould, investment director at retail investing firm AJ Bell, said by email. “The UK economy is faced with the difficult combination of high inflation, slowing growth, rising interest rates, weak consumer confidence and substantial debt piles at the national and consumer level,” he added. UK consumer price inflation breached double digits for the first time in 40 years in July, with Goldman Sachs Group Inc. subsequently warning that it could top 22% next year if natural gas prices remain elevated.
Truss during the contest include scrapping next year’s planned rise in corporation tax to 25% from 19%, a vow not to bring in any new taxes
- Corporate Debt
Borrowing costs for blue-chip British companies have risen past 5% for the first time in more than a decade, as runaway inflation hammers the country’s corporate sector. The yield spread between sterling and dollar-denominated corporate bonds is the widest since 2014, reflecting particularly acute pressures in the UK.
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“I could see investors starting to think the UK doesn’t look such a good place to invest,” Charlie Bean, a former central banker and onetime head of the government’s budget watchdog, told Bloomberg Television. “You’ll see a risk premium re-emerging on gilts, which is just starting to happen.”
“I campaigned as a Conservative and I will govern as a Conservative,” Truss told party leaders in brief remarks after the announcement in London. “We need to show we will deliver over the next two years. I will deliver a bold plan to cut taxes and grow the economy.”
GBP/USD Monthly chart:
The GBP/USD has been in a 20% trading range for 5.7 years from October 2016 until July 2022 between support of $1.1920 and a resistance level of $1.4375. The pair broke down the $1.1920 support in August 2022, losing 4% against the USD, and closed at 1.1620. The pair is currently trading at the August 2022 low price zone. The next monthly support level is February 1985 bottom $1.0520 followed by $0.9535. Monthly resistance levels are $1.1920 and 1.2900
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