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Rishi Sunak faces a very different economy to the one he left as chancellor — here’s what he must tackle as prime minister

Rishi Sunak is taking over as UK prime minister from Liz Truss during very difficult economic times.

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11 months ago

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As the incoming UK prime minister, Rishi Sunak has the immediate advantage of perceived success in his two years as chancellor.

His tenure ended last July when he resigned due to a difference of opinion with then-prime minister Boris Johnson over the economy. But during his time as chancellor, he is credited with rescuing households and businesses from the effects of the COVID pandemic lockdowns by launching an innovative and impressively timely furlough scheme. He reversed a “small state” approach to become the private sector’s temporary paymaster, spending an unprecedented £70 billion to shorten the recession.

This image of having saved the nation by minimising the loss of national output and employment during the pandemic has outshone the less successful moments of his chancellorship. This includes inadequate fraud-proofing of furlough supports, the coronavirus surge that followed his “eat out to help out” hospitality revival scheme and the discussion of his well-sheltered family finances.

Read more: What is a non-dom? An expert answers our questions about the tax status claimed by Rishi Sunak's wife and other wealthy people

But as he takes up the UK’s highest office, the economic supports that enabled the furlough scheme have largely fallen away. The government’s long-term borrowing costs, previously close to zero, had risen above 5% by mid-October, even with the Bank of England shoring up demand to keep bond yields down. At the same time, consumer borrowing has also risen in cost, dowsing any hope of a post-pandemic bounce-back of growth-promoting investment.

The UK now faces a worsening credit rating, which is adding to the risk premium (and therefore cost) that investors place on public debt. And consumers are unlikely to spend their way out of the expected recession. Millions are already struggling to meet rising food, fuel and mortgage bills, knowing their energy costs could jump again when the current price cap ends in April 2023.

In the US, where Sunak earned his MBA and made his fortune, post-crisis presidents are often seen as “Lone Ranger” figures. They ride into town (with a masked companion) to resolve a desperate situation, winning over an initially sceptical public with effective steps that overcome past rivalries and injustices.

Contemporary American Conservatives have emphasised additional plot twists: the Ranger must overcome prejudices and sidestep rigid laws to save the day. This certainly speaks to the task ahead for Sunak as he becomes the fifth UK prime minister in six years.

Can Rishi Sunak clean up the economic mess left by Liz Truss, who resigned as UK prime minister on October 20 2022? Fred Duval / Shutterstock

Staggering under stagflation

Unusually, UK firms are experiencing widespread labour shortages right now, among other supply constraints that usually characterise the peak of a boom rather than the brink of a recession. That’s down to the decade-long stagnation of UK labour productivity. This is a problem that Sunak as a backbencher wanted to tackle with doses of deregulation and labour-market discipline, but which as chancellor he left unresolved.

Productivity growth picked up after the UK propelled the EU to complete its single market from 1992. So Sunak’s support for leaving the EU remains an obstacle to his re-uniting the Conservatives and rebuilding badly burnt bridges with European trade partners. Their importance has been heightened by the declining chance of any transatlantic trade deal and the slowdown in the Chinese economy, which will dampen growth across emerging Asia.

So what’s a new prime minister to do? Having resigned from the cabinet in July, triggering the very Conservative infighting that has now led him to the top job, Sunak can leave the difficult fiscal choices to Jeremy Hunt, his successor as chancellor. But the prime minister still bears ultimate responsibility for the direction the government takes to deal with the economy. Hunt’s statements so far have rescinded most of Kwasi Kwarteng’s mini-budget, indicating that the new government has no room for tax reduction and could be preparing for more painful cuts in public spending instead.

If Hunt sticks to the Conversatives’ election-winning 2019 pledge of no rises in income tax, VAT or national insurance, the government will probably need to deploy “stealth taxes”. This means leaving working people to be taxed more as their wages rise to keep pace with prices while a four-year freeze in tax thresholds imposed by Sunak is still in place. Social benefits could also be allowed to erode through being raised by less than inflation.

The present high rate of inflation would also, in the past, have eased the government’s financial pressures by eroding the costs of public and private debt. But that shield has worn thin. Payments on 25% of the government’s debt are now aligned with the inflation rate, and lenders are rapidly passing on the rise in borrowing costs to mortgage and credit card borrowers.

Former prime minister David Cameron could cite an outgoing Labour government’s budget hole for earlier austerity rounds. But Sunak will struggle to blame his predecessors for the new fiscal squeeze the UK faces. Supporters of Kwarteng are likely to continually remind him – as ex-prime minister Liz Truss did on her way to beating him in the previous leadership contest – that tightening fiscal policy now will only deepen the recession predicted by the Bank of England and many independent analysts.

The rescuer from Number 11 must become “Austerity Rishi” now he’s moved next door. This could make it far more difficult for the Lone Ranger to ride into the sunset after saving the day.

Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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GBP/USD extends losses on mixed UK data

UK retail sales improve, PMIs remain in contraction The British pound is in negative territory after two days of losses. In the European session, GBP/USD…

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1 hour ago

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September 22, 2023

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  • UK retail sales improve, PMIs remain in contraction

The British pound is in negative territory after two days of losses. In the European session, GBP/USD is trading at 1.2245, down 0.40%. The struggling pound is down 1.1% this week and is trading at its lowest levels since late March.

UK retail sales improve, PMIs mixed

It is a busy day on the data calendar for UK releases. Retail sales rose in August by 0.4% m/m, following a 1.1% decline in July and was just shy of the market consensus of 0.5%. The sharp decline in July was largely due to unusually wet weather. On an annual basis, retail sales fell by 1.4%, compared to -3.1% in July. Consumer spending has been in a nasty rut, as annualized retail sales have now declined for 17 straight months. The silver lining was that the -1.4% drop marked the slowest pace of contraction in the current streak.

The September PMIs were a mixed bag. The Services PMI slowed to 47.2 in September, down from 49.5 in August and missing the consensus estimate of 49.2. This marked a second straight deceleration and the sharpest contraction since January 2021. The Manufacturing PMI increased to 44.2 in September, up from 43.0 in August and above the consensus estimate of 43.0.

The decline in activity in both services and manufacturing points to a UK economy that continues to cool. The Bank of England, which held interest rates on Thursday, will be hoping that the slowdown translates into lower inflation and that it can continue to hold interest rates.

UK consumer confidence remains low, but there was a bit of an improvement in September. The GfK consumer confidence index rose to -21, up from -25 in August and beating the consensus estimate of -27. This was the highest reading since January 2022, but the economy has a long way to go before consumers show optimism about the economic outlook.

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GBP/USD Technical

  • GBP/USD is testing support at 1.2267. The next support level is 1.2156
  • There is resistance at 1.2325 and 1.2436

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International

“Go To Hell”: Brave EU Politician Delivers Damning Message To Global Tyrants

"Go To Hell": Brave EU Politician Delivers Damning Message To Global Tyrants

Via The Vigilant Fox,

Member of the European Parliament Christine…

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1 hour ago

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September 22, 2023

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"Go To Hell": Brave EU Politician Delivers Damning Message To Global Tyrants

Via The Vigilant Fox,

Member of the European Parliament Christine Anderson has been an unyielding opponent to Klaus Schwab’s ‘Great Reset’ Agenda. Known best for her famous smackdown on Justin Trudeau, MEP Anderson has established herself as one of the few politicians left who represent the interests of the European people.

September 13 was no different as MEP Anderson took no prisoners in her latest warning to the globalitarian elite. Before the European Parliament, in a session specifically focused on the COVID-19 response and the World Health Organization, MEP Anderson ended the meeting with a powerful statement.

Here’s what she said, word for word:

“We just need to find a way to wake the people up. Because the point is simply this: it comes down to a choice. It’s either freedom, democracy, and the rule of law — or enslavement.

“There is no such thing in between. There is no such thing as a little freedom, a little democracy, a little rule of law, just as there is no such thing as a little enslavement. So that’s the choice. It comes down to – it’s either the globalitarian misanthropists or the people. It comes down to – it’s either us or them. And that’s, I think, what this really is all about.

“Now, when my colleagues and I were elected to this parliament, there was no question about it. We were on the side of the people because the people actually pay us to act in their best interests. That’s our job. And once again, I will say to every single elected representative around the world, to every single member in every elected government around the world, if you do not unequivocally stand with the people and serve in their best interests, act in their best interests, you have no place in any parliament or in any government. You belong behind bars. You may even rot in hell for all I care at this point because that’s exactly what you deserve if you sell out the people.”

*Applause ensued*

MEP Anderson continued. “Now, I would like to make a promise to the people, and I’m pretty sure I can speak or speak on behalf of my colleagues. We will continue to stand with you, the people. We will continue to fight for freedom, democracy, and the rule of law. We will not shut up, and we will not stop going after those despicable globalitarian misanthropists.

“But we would also like to have you make a promise to us. You may have heard it’s all coming back. The first country is already starting [to talk about] mask mandates in Israel. They’re already imposing it. I’ve heard of a few universities in the United States. They’re already bringing it all back. And I would really like for you, the people, to not go along. Simply say no! They want you to wear a mask; say no. They want you to put in another mRNA shot; say no. They want to impose a curfew on you; say no. That’s really all you have to do.

“And it might not be or might sound a little hard, but it’s actually not that hard. Because once you have made it clear to them that you will no longer go along, once you’ve let them know, they cannot scare you anymore. Because as long as you are afraid of what they might do if you don’t comply, they have power over you. Take the power away from them! Simply say no. Once you do that, they don’t have power over you anymore. You will feel so free. Simply say no.

“And considering what we’ve heard today, and considering what we’ve seen in the last three years. Considering what we know they want to implement, heck, you might even be well within your right to tell them to screw themselves and go to hell! That’s where they belong. What will you get out of that? I can tell you. Once you’ve done that, once you’ve told them to just go to hell, they no longer have power over you. You will have an incredible feeling — kind of like a sensation of freedom will swap through your body. I promise you will feel so relieved.

“And this is the state of mind that I would ask all of you to get to. Simply don’t let them grind you down anymore. You are worth it. You are deserving of just standing up for yourselves. And tell them all to go to hell. Thank you very much.”

*  *  *

Subscribe to Vigilant News here to receive updates on the latest and most newsworthy stories.

Tyler Durden Fri, 09/22/2023 - 06:30

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Yen Drops After BOJ Does Nothing and Says Little

Overview:  The BOJ’s failure to do anything or
further ideas that an exit of the negative target rate, despite the firm CPI
report helped the dollar…

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1 hour ago

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September 22, 2023

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Overview:  The BOJ's failure to do anything or further ideas that an exit of the negative target rate, despite the firm CPI report helped the dollar recover the ground lost yesterday against the yen. The focus has returned to "intervention watch" and the market continues to press for the official pain threshold. Sterling is the weakest of the G10 currencies, off another 0.5% today following the BOE's decision not to hike yesterday. The dollar-bloc currencies enjoy a firmer tone. Emerging market currencies are mostly firmer, including the Chinese yuan.

Reports that Beijing is considering reducing some capital controls helped lift Chinese and Hong Kong equities today. Taiwan and Australian equities also advanced, while the other large bourses headed south. Europe's Stoxx 600 is extending yesterday's 1.3% drop, while US index futures are slightly higher. Yesterday's 1.6% drop in the S&P was the largest drop in six months and it was unable to recover from the gap lower opening. That gap (~4375-4401) has technical significance. European bond yields are narrowly mixed, but UK Gilts continue to rally. The US 10-year Treasury yield is slightly softer near 4.48%. Gold has come back firmer after falling more than 0.5% yesterday (its largest loss in around three weeks) and is near the 200-day moving average ($1925). November WTI has steadied and looks to snap a three-day decline. It is back above $90 a barrel and looks poised to settled higher for the fourth consecutive week. 

Asia Pacific

The Bank of Japan did not change its stance, and Governor Ueda gave little hint that a change in rates is possible before the end of the year, as he did earlier this month. Indeed, he suggested those remarks were intended simply to keep the BOJ options open. The dollar, which had fallen to around JPY147.30 yesterday recovered to back toward the recent highs near JPY148.40. Japanese officials underscored they are prepared to counter excessive fx moves. 

Before the BOJ's meeting concluded, Japan reported August CPI figures, which were largely anticipated by the Tokyo CPI previously reported came in a little firmer. The headline rate slipped to 3.2% from 3.3%. The core rates were unchanged. Excluding fresh food, Japan's CPI remained at 3.1% and the measure excluding both fresh food and energy stayed at the cyclical high of 4.3%. Separately, the flash PMI came in softer. The manufacturing PMI eased to 48.6 from 49.6 and the services PMI stands at 53.3, down from 54.3. This saw the composite fall to 51.8 from 52.6. Lastly after buying the most foreign bonds since 2020 in the week ending September 8 (~JPY3.6 trillion or ~$24.5 bln), Japanese investors bought another JPY885.5 bln. Meanwhile, while foreign investors bought JPY438 bln of Japanese bonds, they dumped JPY1.58 trillion of Japanese stocks, most in four years.

Australia's flash PMI showed the service sector grew (50.5 vs. 47.8), while the manufacturing sector slump deepened (48.2 vs. 49.6). Manufacturing new orders were the weakest since May 2020. The composite rose above 50 (to 50.2 from 48.0) for the first time in three months. The central bank meets on October 3 and the market sees practically no chance of a change in rates. 

Yesterday, the dollar traded on both sides of Wednesday's range but the close was within the range, which removed much of the technical significance of the outside day. The broad range may be best explained by short covering of the yen ahead of the BOJ meeting. The dollar is trading back above JPY148.00 as the market continues to test the official resolve. The dollar settled near JPY147.85 last week and has only falling in one week since the end of July. The Australian dollar peaked before the FOMC meeting outcome near $0.6510 and found some bids near $0.6385 yesterday. It settled at $0.6415. It is trading with a firmer bias today and is knocking around $0.6440. To help stabilize the technical tone, the Aussie needs to get back above the $0.6465 area. However, the intraday momentum indicators are stretched in the European morning, suggesting some back and filling in early North American activity. Reports suggesting China is considering lifting some capital controls helped the yuan steady today. The greenback has been in about a 35-pip range on either side of CNY7.30. The dollar's reference rate was set at CNY7.1729. The average in Bloomberg's survey was CNY7.3028 and the gap with the fix was the widest yet. Offshore liquidity is being squeezed.

Europe

Following the flurry of European central bank meetings yesterday, the preliminary September PMI lost some of its luster. Norway, where we thought there was scope for surprise, turned out to be the least surprising. Sweden hiked but was more cagey about another hike, lifting its policy path by 10 bp. Milquetoast. It announced it would liquidate a quarter of its currency reserves, which was unexpected. The Swiss National Bank stood pat, surprising economists. But the swaps market did not think a hike was the most likely scenario, but the franc sold off hard anyway. The market went into the BOE meeting with an almost 50/50 outlook after the soft August CPI. In a 5-4 vote, where Governor Bailey cast the deciding vote, the BOE stood pat. It cut Q3 GDP forecast to 0.1% from 0.4%. However, it increased the pace of the balance sheet unwind to GBP100 bln in the fiscal year beginning next month from GBP80 bln this fiscal year.

The eurozone flash September PMI was mixed. The manufacturing PMI slipped to 43.4 from 43.5 and the services PMI edged up to 48.4 from 47.9. The composite stands at 47.1, up from 46.7. New orders softened to 44.5 from 44.6, which is the lowest since November 2020. Germany's preliminary readings were poor but better than August. The manufacturing PMI is at 39.8 (from 39.1). The services PMI is at 49.8 (47.3). The composite rose to 46.2 from 44.6, the first uptick since April. France moved in the opposite direction. Its PMI fell. The manufacturing tumbled to 43.6 from 46.0. The services PMI is at 43.6, down from 46.0. The composite now stands at 43.5 compared with 46.0 in August, a new low since late 2020. 

The UK reported August retail sales. After falling a revised 1.1% in July (initially -1.2%), UK retail sales rose 0.4% in August, slightly less than the median projection in Bloomberg's survey. The flash PMI was disappointing. While the contraction in manufacturing eased (44.2 from 43.0), the contraction in services deepened (47.2 from 49.5). The composite PMI fell to 46.8 from 48.6, a new three-year low.

After posting an outside down day on Wednesday, the euro extended its decline to almost $1.0615 yesterday, a six-month low, and retested it today. Since the low was recorded, the euro's high has been about $1.0650. The price action, however, is uninspiring and an important low does not seem in place. Sterling was punished for the BOE's failure to deliver a hike, which was roughly 50% discounted. Yesterday's six-month low was near $1.2240 has been taken out today, and a marginal new low closer to $1.2230 has been recorded. Like the euro and yen, sterling recovered into the close of the European session to trade a little above $1.2300. It spent the North American afternoon in about a 10-tick range and settled a couple of hundredths of a cent below $1.23, and today, was sold when it briefly poked above it. Nearby support is seen near $1.22, but the next important target is the $1.2000-$1.2075 area. 

America

US data was mixed yesterday. The Q2 current account deficit was slightly smaller than expected but it was inconsequential. Weekly jobless claims were lower than expected and the four-week average (217k) is the lowest since February. Continuing claims fell to their lowest since January. The September Philadelphia Fed survey was showed a sharp deterioration (to -13.5 from 12.0) and existing home sales fell for the third consecutive month, defying expectations for a small gain, after falling nearly 5.5% in the previous two months. The August index of Leading Economic Indicators continued it uninterrupted decline that goes back to Q1 22. Attention today turns to the preliminary September PMI, where economists expect slightly firmer readings. Still, the market is trying to adjust to the signal by the FOMC sees an economy growing faster than its non-inflationary speed limit, requiring policy to be restrictive for longer. The Fed funds futures strip does not have the first fully discounted in late Q3 24. By comparison, the swaps market has the first ECB cut fully discounted by early Q3. 

Canada reports July retail sales today. Somewhat better numbers than June are expected when retail sales rose 0.1%, driven by autos. With them, retail sales fell by 0.8%. The swaps market has almost an 80% chance of another Bank of Canada rate hike by the end of the year. No cut its priced through Q3 24. Inflation for the first half of September will be reported by Mexico today. The bi-weekly reading may accelerate slightly, but the downtrend in the year-over-year rate should continue. The central bank meets next week, but policy is expected to be steady well into next year. The swaps market seems to be pushing the first cut into Q2 24.

The US dollar popped up to almost CAD1.3525 yesterday. The week and month's low were set on Tuesday near CAD1.3380. The greenback's momentum stalled, and it settled slightly below CAD1.3485. It is trading with a heavier bias but is holding above yesterday's low near CAD1.3450. Support now is seen around CAD1.3440, but the US dollar looks set to trade higher in North America today. After briefly dipping below MXN17.00 before the outcome of the FOMC meeting, the dollar reached MXN17.25 yesterday. That is a little shy of the (38.2%) retracement of the leg down from the nearly four-month high set on September 7 around MXN17.7080. The next retracement (50%) is slightly above MXN17.35. It is consolidating in the European morning mostly MXN17.16. 


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