The Prime Minister of the United Kingdom, Boris Johnson, is giving his successor an economic ‘disaster’

London
CNN Business
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Across the UK, businesses and households are warning they won’t make it through the winter without help from the government. This sets up a big challenge for the incoming prime minister, who will be announced on Monday.

For months, the UK has been dealing with a leadership vacuum, as the country spirals into recession and into a humanitarian crisis fueled by rising energy bills.

Growth prospects have weakened since Boris Johnson announced his resignation in July. Annual inflation is running above 10 percent as food and fuel prices rise. Frustration over the cost of living has forced hundreds of thousands of port, rail and postal workers to go on strike. The British pound recorded its worst month since the 2016 Brexit referendum, hitting its lowest level against the US dollar in more than two years.

“It’s just one blow after another,” said Martin McTague, head of the UK Federation of Small Businesses. “I’m afraid I got no news.”

The situation may get worse before it gets better. As the energy crisis deepens, the Bank of England expects inflation to reach 13 percent. Citigroup estimates UK inflation could reach 18 per cent by early 2023, while Goldman Sachs warned it could reach 22 per cent if natural gas prices “remain at current levels”.

The contenders to replace Johnson – current foreign secretary Liz Truss and former finance minister Rishi Sunak – have been called on to announce a dramatic intervention immediately. from them He has become the country’s fourth Conservative leader in a decade.

The most pressing issue is dealing with the ever-increasing cost of energy, which could cause business closures and force millions of people to choose between putting food on the table and heating their homes this winter. Experts warn that unless something is done quickly, people will be left in poverty and deaths will increase in cold weather.

Truss told the BBC on Sunday that she would make an announcement on the “serious energy issue” within a week of being elected prime minister. A broader economic package will follow within a month, he said.

Jonathan Neam, head of Britain’s biggest brewer Shepherd Neam, said: “Everyone is anticipating that there will be a quick and decisive announcement that will put this issue to rest or at least reassure people. If not, that person will be under too much pressure.

From October, household energy bills will rise 80% a year to an average of £3,549 ($4,106). Analysts say that the family price ceiling may increase It rose above £5,000 ($5,785) in January and jumped above £6,000 ($6,942) in April.

As people are forced to reassess their budgets, the surge in spending that followed the Covid-19 lockdowns is spreading rapidly. The Bank of England has warned that the UK economy will fall into recession in the coming months.

Ben Zaranko, senior research economist at the Institute for Fiscal Studies, said: “The key challenge posed by rising energy prices is that energy-intensive households – and particularly poor households – are struggling to make ends meet. “It would mean really big cuts in other areas of spending.”

Meanwhile, Neame, whose portfolio includes around 300 pubs in southern England, said business owners were panicking. In general, if you can find suppliers, crazy numbers are being quoted for utility bills a year ago. Nick MacKenzie, head of the Greenie King pub chain, said one venue he works with has seen energy costs rise by £33,000 ($38,167) a year.

“It’s very difficult for many businesses, especially those that have come through Covid in a weakened state,” McTague said. “Now they’re struggling to deal with another once-in-a-lifetime disaster.”

A collapsing British pound is exacerbating the problem, making it more expensive to import energy and other goods, further driving up inflation.

That’s not the only reason business owners and investors are increasingly worried. While job vacancies fell between May and July, they remain above 60% of pre-pandemic levels. Finding workers to fill vacancies in the UK has been a particular challenge since the country voted to leave the European Union. In the year According to the Office for National Statistics, there will be 317,000 fewer EU citizens living in the UK in 2021 than in 2019.

Brexit is crippling trade, particularly with the EU, the UK’s biggest trading partner. Exports and imports will be 15% lower than they would have been had the UK remained in the EU, the Office for Budget Responsibility has predicted.

Dean Turner, UK economist at UBS, said it was up to the new prime minister to try to make the most of the country’s space without causing further turmoil. But hard-line British lawmakers are pushing Johnson to scrap a key part of the Brexit deal he signed with the EU, which could ultimately lead to a trade war with Britain’s biggest export market.

“Brexit has happened. It is what it is, we’ve all got our own opinions on it,” Turner said. But we have to work with him to make it better for us, and I just struggle to see if there’s any motivation to do that.

Truss, who is expected to take over from Johnson after his government collapsed in a series of scandals earlier this summer, has promised to jumpstart the economy by cutting taxes. But many economists fear this approach could fuel inflation and hurt weak public finances, while failing to put money in the pockets of those who need it most.

“Benefits of cutting [taxes] According to Jonathan Marshall, senior economist at the Relation Foundation, it will flow more to those who pay more tax.

There’s no way the state will avoid paying big bucks to deal with the energy crisis this winter, but targeted measures to avoid waste will be necessary. Freezing gas and electricity prices could cost the government more than £100 billion, or $116 billion, over the next two winters, according to researchers at the Government Institute.

“Power is expensive, gas is expensive,” Marshall said. “This must be paid to prevent people from freezing in their homes. But the state doesn’t need to pay those who can afford it.

There are also questions about how the incoming government will handle large-scale economic intervention, especially if tax cuts – and government revenue – are a priority.

The UK government has borrowed heavily to provide support during the coronavirus lockdowns. The country’s debt is now nearly 100% of its gross domestic product. When interest rates were low, and access to money was cheap, this was not a major issue.

But that’s not the case now. The Bank of England has been on a hike as it tries to contain inflation. This makes it more expensive for the government to service its debt. The UK has increased its risk exposure by issuing a number of inflation-linked bonds.

“It’s the perfect cocktail of temptations to put public finances at risk in a way that hasn’t happened in recent times,” said Zaranko of IFS.

Kwasi Kwarteng, who is expected to become finance minister if Truss wins, wrote in the Financial Times on Sunday that her government would act in a “fiscally responsible way”.