Business Unusual Writer
Without a clear plan and facing severe governmental disagreement, the UK is expected to experience a once-in-a-generation pressure on living standards in the coming months. Therefore, there is a considerable possibility of significant policy error. - Analysts at Citi
The departure of Prime Minister Boris Johnson adds to the economic uncertainties facing Britain, which is already under pressure from double-digit inflation, the possibility of a recession, and Brexit.
Johnson, who announced his resignation from office on Thursday, may need weeks to find a replacement. The fifth-largest economy in the world would then be at risk of further drift at a time when the pound is close to two-year lows versus the dollar and the Bank of England is struggling to raise interest rates without hurting the economy.
Leadership races in the Conservative Party can last for several years. As other candidates withdrew in 2016, Theresa May just needed a little over three weeks to win. David Cameron had previously run.
However, it took Johnson two months to succeed May as the top dog after she declared her plan to step down in 2019. This time, at least six contenders are anticipated. The main concerns that the British economy is facing while the political drama unfolds are listed below.
Britain is under pressure from an inflation rate that is at a 40-year high of 9.1 percent greater than many other nations. The BoE predicts that it will surpass 11% later this year. In April, the IMF predicted that the UK would experience slower growth and more persistent inflation than any other large economy in 2023.
Sterling’s recent slide has added to the inflation pressures since then, although the likelihood of additional public expenditure or tax cuts to prop up the Conservative Party’s fortunes pushed up the pound a bit on Thursday. But whoever succeeds Johnson will only be able to mitigate the effects of the spike in food and energy prices to a limited extent.
Whoever replaces Johnson will have to make important fiscal and spending choices that may lessen the likelihood of a recession but potentially raise the risk of inflation. Johnson, who had long advocated for additional tax cuts, and Rishi Sunak had different political philosophies, according to Rishi Sunak, who resigned as finance minister on Tuesday. Prior to his resignation, Sunak's top aim was to reduce Britain's debt, which increased to over 2 trillion pounds due to the coronavirus outbreak.
Johnson's insistence on changing the rules for trade including Northern Ireland, which he agreed to in 2019, has kept London and Brussels at odds more than six years after Britain chose to exit the European Union.
Although any improvements in the overall trading relationship are likely to be minor, some economists have projected higher British exports and investment due to the likelihood of better relations with the EU under a new prime minister. Additionally, some of the front-runners to succeed Johnson, most notably foreign minister Truss, openly supported his aggressive posture toward the EU.
Bank of England
The central bank of the United Kingdom has increased interest rates five times since December, the steepest run of increases in 25 years, and it has indicated it would continue to do so at its next meeting in August, possibly by as much as half a percentage point.
However, recent reductions in investor betting on that kind of significant shift by the BoE are due to the prospect of a worldwide economic slowdown. Another reason to exercise cautious could be the ambiguity around the course of Britain's fiscal policy.
More political turbulence
While Johnson's departure marks the end of another chapter in one of the most turbulent periods in modern British political history, it is unclear whether his successor will be able to bring order to the situation.
Britain's economy would gain if Johnson were replaced with "a more meticulous and serious guy," according to Kallum Pickering, an economist at Berenberg. But the Citi analysts expressed doubt that the various Conservative Party groups would unite on a distinct approach.
"In the next months, we expect the UK to experience a once-in-a-generation squeeze on living standards, without a clear strategy and with a deeply divided government. Therefore, there is a considerable chance of a serious policy error, they added.
Even while we still anticipate a contest in 2024, an early election should not be ruled out.