Voices of the City: Rishi may have to turn his hand-brake too
Ishi Sunak, at the age of 42 years and 163 days, rose to office as the youngest PM since Robert Jenkinson, 2nd Earl of Liverpool in 1812, who was 42 years and a day older. Rishi arrived there based on the votes of 357 Tory MPs.
The cost of borrowing fell on the news which is good. But after initially rising to $1.14, the pound fell back to below $1.13 by the end of the day. The honeymoon period probably lasted less than a day. The further decision of the markets is coming soon.
The same day the new prime minister took office after a 45-day run, the much-anticipated Purchasing Managers’ Composite Index was published suggesting the UK had already entered a recession. Services and manufacturing were both in negative territory. Subsequently, data released from the ONS over the past few days shows that there was a 1.5% decline in retail sales in September compared to August, while GDP declined by 0.3% in August alone. Also, now mortgage lenders take back mortgages for first time buyers. A collapse in the housing market is inevitable. The slowdown is going to be short-lived and inflation, which is already at its peak, will ease with the end of the major base effects.
None of this is good news.
Sunak warned, as I wrote in the pages of this newspaper, that Trusonomics was going to be a disaster and it was not going to work and it did not. This caused the bond and foreign exchange markets to crash, nearly wiped out the UK pension sector and resulted in mortgage firms withdrawing their products because they were unable to price them. All that in two business days. A day is a very long time in economics.
The Tory party took it upon themselves and Boris’s dash in vain from the Dominican Republic was freed in the spirit of a political party. The Tories are now so far behind in the polls that they will be wiped out in the general election. Sanak will have to pick up the pieces. He must also placate the markets by making sure his dysfunctional party is behind him and not fighting like ferrets in a sack. good luck with him.
The question is whether Sunak, who has been in Parliament for seven years and has held only two senior positions, can calm the nerves. He got stuck in the partygate and the issue of his wife’s non-dom status created problems. The truce appears to have permanently eliminated the prospect of a US trade deal.
Sadly, the experiment in trickledown economics has permanently damaged Britain and made it difficult for Sage to get things back to normal. Trusonomics raised borrowing costs and the country’s reputation in the world, and downgraded the outlook on the UK’s credit rating: this so-called ‘fool premium’. Why would companies invest in the UK when they see such chaos? Everyone is poor because of the truss.
Who is going to be the chancellor then? It looks like Hunt clearly has no victories, the poison cup will be at work. There are no other obvious contenders. How will he pay for energy price guarantees without an unexpected tax on energy companies and even banks? Is he really going to go ahead with reckless spending cuts, given that spending cuts have already been made by Osborne? Will Hunt agree to a triple lock on pensions and allow pensions to grow with inflation? If he doesn’t, there will be a lot of opposition.
The right course of action in a recession is to cut interest rates and increase public spending and cut interest rates. It quickly pulled Britain out of recession in 2009. This is what is needed now. It seems that Sunak is set to do the exact opposite as are Bailey and his friends in the BOE.
The biggest worry for Sunak is that if public finances collapse, bond guards will follow him, as they do in a recession. Liz Truss may well not be the only one to do a U-turn, and soon to be the dreaded Handbrake.
Credit: www.standard.co.uk /