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The UK economy has yet to recover from the pandemic. Now he’s back on the ropes | CNN Business




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There was good and bad news in Friday’s revised data on the UK economy. It grew marginally in the second quarter of the year, instead of contracting as previously estimated.

But the latest update from the Office for National Statistics also showed that the UK is the only G7 economy that has not fully recovered from the pandemic, with GDP still 0.2% smaller than at the start of 2020. And, according to the Bank of England, the economy is most likely already contracting again, with inflation heading for 11%.

“The important thing [in Friday’s data] was that the UK is struggling to grow and is likely to face a deeper recession in the future, and today’s review doesn’t change that,” said Craig Erlam, senior market analyst at Oanda.

It may be a long time before it recovers, given the crisis sparked by Prime Minister Liz Truss’s decision last week to unveil huge unfunded tax cuts along with a massive package of energy subsidies. That gamble spooked financial markets and sent borrowing costs skyrocketing for the government, businesses and households.

“You have all these things together, which go against the government’s goals of higher growth and lower inflation,” Mohamed El-Erian, a bond market expert and adviser to Allianz, told CNN earlier this week. . “And again, the situation was not good to begin with. Now, the problems have been amplified.”

An emergency intervention by the Bank of England on Wednesday calmed markets and prevented the collapse of some pension funds. But Truss’s plan to boost growth has backfired badly as investors now expect the central bank will have to raise interest rates by 1.25% or even 1.5% before November 2 to address its inflationary impact.

What happens next is far from clear. Truss and his finance minister, Kwasi Kwarteng, insisted on Thursday that they would stick to their plan, but they have a very narrow window, perhaps as little as two weeks, to convince investors they can be trusted with the nation’s finances. . The Bank of England’s emergency bond buying will end on October 14.

After spending the summer criticizing economic orthodoxy and, in the words of former central bank governor Mark Carney, “undermining” some of the UK’s most important institutions, Truss and Kwarteng met on Friday with one of those key players, the Office of Budget Responsibility.

The OBR provides an independent assessment of the impact of government budgets on borrowing and growth. Truss and Kwarteng had turned down his offer to provide a draft analysis of last Friday’s tax bombshell.

Mel Stride, a top lawmaker from Truss’s Conservative Party, said the OBR is likely to send a very uncomfortable message on Friday.

“I strongly suspect that it will be that this circle cannot be squared,” Stride told the BBC.

Promising large unfunded tax cuts with high inflation and a tight job market, and expecting the reforms to generate the growth to pay for them, would not work.

“So there needs to be a rethink and that’s going to be a very difficult conversation,” Stride said.

The OBR said after the meeting that it will deliver its initial forecasts to Kwarteng on October 7. Treasury said it would release the forecast along with its medium-term fiscal plan on Nov. 23, resisting calls from lawmakers to release it as soon as possible. .

The big problem for the UK government is that it is caught between having to reassure the markets and voters who are increasingly angry about their spiraling mortgage costs.

“Truss will at all costs avoid increasing, postponing or abandoning tax cuts, as such a reversal would be humiliating and could leave her a lame prime minister,” Mujtaba Rahman and Jens Larson at political risk consultancy Eurasia Group wrote earlier. this week.

The only alternative left to balance the books would be to cut government spending, and that would prove just as difficult politically as a recession looms with its public services under enormous pressure and a restless workforce that has shown that is ready to strike in large numbers for wages.

The poll ratings for the Conservative Party have collapsed. The British polling agency Survation this week registered the biggest advantage in its history for the opposition Labor Party over the ruling Conservatives: 21 points.

The poll, taken on September 28 and 29, found that 49% of respondents said they would vote Labor if an election were held tomorrow, up six points from September 5, the day before Truss took office. The Conservative Party was at 28%, five points less.

A separate IpsosUK poll, also published on September 29, showed that Labor has a clear advantage over the Conservatives on economic policies, management of taxes and public spending and the cost of living crisis.

— Jorge Engels, Chris Liakos, Livvy Doherty, Dan Wright, Jorge Engels, and Morgan Povey contributed to this article.



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