The UK economy: what happens after the crisis?

CNN business

There was good news and bad news in revised data on the UK economy on Friday. It increased in the second quarter of the year – to a certain extent – instead of decreasing 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% lower than at the start of 2020. And, according to the Bank. In England, the economy is probably shrinking again, with inflation running at 11%.

“The most important thing [in Friday’s data] The UK is growing and facing a deeper recession going forward, and today’s review does not change that,” said Craig Erlam, senior market analyst at Oanda. ,

It may be a long time before it recovers, given the crisis triggered by Prime Minister Liz Truss’s decision last week to unveil massive unfunded tax cuts alongside a massive energy subsidy package. That gamble spooked financial markets and drove up borrowing costs for the government, businesses and households.

“All these things come together that will go against the government’s goals of higher growth and lower inflation,” bond market expert and Allianz adviser Mohamed El-Erian told CNN earlier this week. “And again, the situation was not very good to begin with. Now, the problems have increased.”

An emergency intervention by the Bank of England on Wednesday calmed the markets and prevented the collapse of some pension funds. But the Truss plan to boost growth has backfired, with investors now expecting the central bank to raise interest rates by 1.25% or 1.5% by November 2 to counter its inflationary impact.

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

Having spent a summer upsetting 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 with one of those key figures on Friday, the Office for Budget Responsibility.

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

Mel Stride, a senior MP in Truss’s Conservative party, said the OBR would deliver a very uncomfortable message on Friday.

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

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

“So it has to be reconsidered and that’s going to be a very difficult conversation,” Stride said.

The OBR said after the meeting it will deliver the initial forecasts to Kwarten on 7 October. The Treasury said it would publish the forecast alongside the medium-term fiscal plan on November 23, heeding calls from lawmakers to release it as soon as possible. .

The UK government’s big problem is that it is caught between the need to calm the markets and an electorate increasingly angry at the spiraling cost of mortgages.

“Truss will avoid raising, delaying or scrapping tax cuts at all costs, as such a rollback would be humiliating and could leave him looking like a lame-duck prime minister,” wrote Mujtaba Rahman and Jens Larson at political risk consultancy Eurasia Group. this week.

The only alternative left to balance the books would be to cut government spending, which would be just as difficult politically as it is facing a recession with its public service under strain and a retrenched workforce that has shown itself ready for numerous overpaid strikes.

The Conservative Party’s poll ratings have fallen. The Survation polling agency has given the opposition Labor party its biggest-ever lead over the ruling Conservatives this week: 21 points.

The poll, carried out on September 28-29, found 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.

An IpsosUK poll released on September 29 also showed Labor ahead of the Conservatives on economic policies, tax and public spending management and the cost of living crisis.

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