There was good news and bad news in Friday’s revised data about the UK economy. It rose — marginally — in the second quarter of the year, instead of declining as previously forecast.
But the latest update from the Office for National Statistics also showed that the United Kingdom is the only G7 economy that has not fully recovered from the pandemic, with GDP down 0.2% compared to early 2020. And, according to the Bank of England, the economy is probably already shrinking, with inflation hovering at 11%.
“Important thing [in Friday’s data] The UK is struggling for growth and faces a potentially deep recession down the road, and today’s revision doesn’t change that,” said Craig Erlam, senior market analyst at Oanda. of
The crisis sparked by Prime Minister Liz Truss’ decision last week to unveil massive unfunded tax cuts alongside a massive package of energy subsidies could take a long time to recover from. That gamble spooked financial markets and drove up borrowing costs for governments, businesses and households.
“You have all these things coming together, which are going to go against the government’s goals of high growth and low inflation,” Mohamed El-Erian, a bond market expert and consultant at Allianz, told CNN earlier this week. “And again, the situation was not good to begin with. Now the problems have increased.”
Emergency intervention by the Bank of England on Wednesday calmed markets and prevented some pension funds from collapsing. But the truss plan to boost growth has had a bad effect, with investors now expecting the central bank to raise interest rates by 1.25% or even 1.5% by November 2 to counter the inflationary impact.
It is not clear what will happen next. Truss and her Finance Minister Kwasi Kwarteng insisted on Thursday that they would stick to their plan, but said they have a very narrow window – perhaps less than two weeks – to convince investors that they can be trusted with the country’s finances. The Bank of England’s emergency bond purchases are set to end on October 14.
After spending the summer bashing fiscal orthodoxy, and — in the words of former central bank governor Mark Carney — “disrupting” some of the UK’s key 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 the government budget on borrowing and growth. Truss and Kwarteng declined an offer to provide a draft analysis of last Friday’s financial bombshell.
Trus’ Conservative Party senior lawmaker Mel Stride said the OBR was likely to send a very uncomfortable message on Friday.
“I strongly suspect that this circle cannot be squared,” Stride told the BBC.
With rising inflation and a tight labor market, promising massive unfunded tax cuts and expecting reforms to compensate for them won’t work.
“So there needs to be a rethink and it’s going to be a very difficult conversation,” Stride said.
The OBR said after the meeting that it would deliver its preliminary estimates to Kwarteng on October 7. The Treasury said it would publish the forecast along with its medium-term fiscal plan on November 23, defying MPs’ calls for an early release. .
The big problem for the UK government is that it is caught between reassuring the market and an electorate increasingly angry at the rising cost of their mortgages.
“An extension, postponement or abandonment of tax cuts by Truss will be avoided at all costs as such a reversal would be humiliating and could make her look like a lame duck prime minister,” wrote Mujtaba Rahman and Jens Larsen at political risk consultancy Eurasia Group. this week.
The only option to balance the books will be to cut government spending, and that will prove equally difficult politically because of the heavy strain on recessionary public services and a restive workforce that has shown it is ready to strike in large numbers over pay.
Poll ratings for the Conservative Party have collapsed. British polling agency Survation this week reported the largest ever lead for the opposition Labor Party over the ruling Conservatives – 21 points.
The poll, conducted on 28-29 September, found that 49% of respondents said they would vote Labor if an election were held tomorrow, six points higher than on September 5, the day before Truss took office. The Conservative Party was at 28%, down five points.
A separate poll released by IpsosUK on September 29 found Labor in a clear lead over the Conservatives on policies for the economy, managing taxes and public spending and the cost of living crisis.
– George Engels, Chris Liakos, Livy Doherty, Dan Wright, George Engels and Morgan Povey contributed to this article.