San Francisco Frontiers - Incoming PM Sunak inherits UK economy in crisis

Outgoing Prime Minister Truss resigned after her budget of tax cuts funded by debt sent shockwaves through markets, crashing the pound.

That caused the government to U-turn on most of its budget, including scaling back a cap on soaring energy bills that have contributed heavily to a cost-of-living crisis for tens of millions of Britons.

Data Monday showed Britain's economic downturn has worsened in October, with private-sector output at a 21-month low.

"October's flash PMI data showed the pace of economic decline gathering momentum after the recent political and financial market upheavals," noted Chris Williamson, chief business economist at S&P Global Market Intelligence that helped compile the figures.

"The heightened political and economic uncertainty has caused business activity to fall at a rate not seen since the global financial crisis in 2009 if pandemic lockdown months are excluded."

Williamson added that upcoming data would likely show Britain already in recession.

The S&P Global/ CIPS flash UK composite purchasing managers index stood at 47.2 in October, below September's level of 49.1.

A figure under 50 indicates a contraction.

The UK is not alone, however, with separate S&P data pointing to "impending recession" in Germany, Europe's biggest economy.

- 'Sunak stability' -

Truss resigned last Thursday after just 44 days as prime minister. She had succeeded Boris Johnson on September 6 after a weeks-long campaign against Tory rival Sunak.

The former chancellor of the exchequer had warned in the battle to succeed Johnson that tax cuts promised by Truss when government debt had already soared on Covid interventions was the wrong policy to pursue.

He was proved right as the budget sent the pound crashing to a record-low close to parity with the dollar and triggered yields on government bonds to soar.

With Sunak seen as bringing stability to markets, sterling rose and yields fell Monday.

"Investors clearly hope Sunak will stabilise the economy and the political situation -- though it's hard to work out at this point which is the harder task," said AJ Bell financial analyst Danni Hewson.

"As well as the recovery in sterling and the reduced cost of government borrowing (as yields drop), Sunak will be pleased to see European gas prices" falling.

However, with UK inflation at a 40-year high above 10 percent, the Bank of England is set to unveil another bumper interest-rate hike at a regular policy meeting next week.

This will heap further pressure on borrowers, including homeowners who have seen mortgage rates surge in the wake of the government's costly budget.

Shevaun Haviland, director general of the British Chambers of Commerce, urged Sunak to also help out businesses struggling with huge energy bills.

"The political and economic uncertainty of the past few months has been hugely damaging to British business confidence and must now come to an end," she said in a statement after Sunak's new position was confirmed.

"The new prime minister must be a steady hand on the tiller to see the economy through the challenging conditions ahead.

"This means setting out fully costed plans to deal with the big issues facing businesses; soaring energy bills, labour shortages, spiralling inflation, and climbing interest rates." 

B.Ramirez--SFF