By Mark Thompson, CNN Business
Friday’s revised UK economic data contained both good and bad news. It grew — marginally — in the second quarter of the year, rather than contracting as previously thought.
However, the latest update from the Office for National Statistics also showed that the UK is the only G7 economy not to have fully recovered from the pandemic, with GDP still down 0.2% from where it started the year 2020. And according to the Bank of England, the economy is most likely already contracting again, with inflation approaching 11%.
“The important thing [in Friday’s data] was that the UK is struggling for growth and is likely to face a deeper recession in the future, and today’s revision doesn’t change that,” said Craig Erlam, Senior Market Analyst at Oanda.
Given the crisis sparked last week by Prime Minister Liz Truss’ decision to announce huge unfunded tax cuts alongside a massive package of energy subsidies, recovery may be a long time coming. This gamble spooked the financial markets, driving up the cost of borrowing for governments, businesses, and households.
“All these things are coming together that will run counter to the government’s goals of higher growth and lower inflation,” Mohamed El-Erian, bond market expert and advisor to Allianz, told CNN earlier this week. “And again, the situation wasn’t great at first. Now the problems have intensified.”
Emergency intervention by the Bank of England on Wednesday calmed markets and prevented some pension funds from collapsing. But Truss’ plan to boost growth has backfired as investors now expect the central bank will have to hike interest rates by 1.25% or even 1.5% by Nov. 2 to mitigate its inflationary impact fight.
What’s next for the UK economy
What happens next is far from clear. Truss and her finance minister, Kwasi Kwarteng, insisted Thursday they would stick to their plan, but they have a very tight window — perhaps just two weeks — to convince investors 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 economic orthodoxy and, in the words of former central bank governor Mark Carney, “undermining” some of Britain’s most important institutions, Truss and Kwarteng met with one of those key players, the Office of Budget, on Friday responsibility.
The OBR provides an independent assessment of the impact of government budgets on borrowing and growth. Truss and Kwarteng had declined their offer to provide a draft analysis of last Friday’s fiscal bombshell.
Mel Stride, a senior Truss Conservative Party lawmaker, said the OBR is likely to deliver a very uncomfortable message on Friday.
“I strongly suspect that this circle cannot become square,” Stride told the `.
Promising big unfunded tax cuts in high inflation and a tight labor market, and expecting reforms to generate the growth to pay for them, wouldn’t work.
“So there needs to be a shift in thinking and that’s going to be a very difficult conversation,” Stride said.
The OBR said after the meeting that it would send its first forecasts to Kwarteng on October 7. The Treasury Department said it would release the forecast along with its medium-term fiscal plan on November 23, defying lawmakers’ calls for it to be released as soon as possible.
Political problems for Truss
The big problem for the UK government is that it is caught between the need to calm markets and voters who are increasingly angry about the rising cost of their mortgages.
“Raising, postponing or abandoning tax cuts will be avoided by Truss at all costs, as such a reversal would be humiliating and could make her look like a lame prime minister,” wrote Mujtaba Rahman and Jens Larson of political risk consultancy Eurasia Group earlier this week.
The only alternative left to balance the books would be to cut government spending, and that would prove equally difficult politically as a recession looms as public services are under enormous strain and a restless workforce has shown it is ready to strike in large numbers over pay.
The Conservative Party’s poll numbers have plummeted. British polling firm Survation this week recorded the opposition Labor Party’s largest lead over the ruling Conservatives – 21 points.
The poll, conducted September 28-29, found that 49% of respondents said they would vote Labor if elections were held tomorrow, up six points from September 5, the day before Truss took office. The Conservative Party was 28%, down five points.
A separate poll by IpsosUK, also released on September 29, showed Labor have a clear lead over the Conservatives on economic policy, the management of tax and public spending and the cost of living crisis.
— Jorge Engels, Chris Liakos, Livvy Doherty, Dan Wright, Jorge Engels, and Morgan Povey contributed to this article.
The CNN Wire
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