UK Prime Minister: Boris Johnson hands over his successor an economic “disaster”

For months, the UK suffered from a leadership vacuum as the country slid into recession and a humanitarian crisis caused by rising energy bills.

Since Boris Johnson announced that he would He left office in JulyGrowth prospects weakened. annual inflation run above 10% With rising food and fuel prices. Frustration at the rising cost of living has forced hundreds of thousands of workers to work in ports, trains and mailrooms to go on strike. The British pound just recorded its worst month since the aftermath of the 2016 Brexit referendum, hitting its lowest level against the US dollar in more than two years.

“It’s just one hit after another,” said Martin MacTag, who heads the UK Small Business Consortium. “I’m afraid I won’t find any good news.”

The situation can get worse before it gets better. The Bank of England expects inflation to jump to 13% as the energy crisis intensifies. Citigroup estimates UK inflation Can peak at 18% In early 2023, while Goldman Sachs warned it could reach 22% if natural gas prices remain “high at current levels”.

The contenders to succeed Johnson – current Secretary of State Liz Truss and former finance minister Rishi Sunak – face calls to announce a dramatic intervention sooner. who are they He becomes the country’s fourth conservative leader in a decade.

The most pressing problem will be dealing with the skyrocketing energy cost, which could unleash a wave of business shutdowns and force millions of people to choose between putting food on the table and heating their homes this winter. Experts warned that people will do it They became destitute Cold weather deaths will rise unless something is done quickly.

“Everyone is assuming there will be a quick and decisive announcement that will put this issue to bed, or at least give people reassurance,” said Jonathan Neame, who runs Shepherd Neame, Britain’s oldest brewer. “If he wasn’t there, this person would be under too much pressure.”

energy disaster

Household energy bills will rise 80% to an average of £3,549 ($4106) a year from October. Analysts say the family price cap could happen It rose to more than 5,000 pounds ($5,785) in January and jumped above 6,000 pounds in April ($6,942).

& # 39;  Starve or 'freeze to death': Millions of older Britons fear a bleak choice this winter as costs soar

As people are forced to reassess their budgets, the consumption boom that followed the Covid-19 lockdown is quickly dissipating. The Bank of England has warned that the British economy will fall into recession in the coming months.

“The main challenge posed by high energy prices is that households that use a lot of energy – particularly poor households – will really struggle to make ends meet,” said Ben Zaranco, chief economist at the Institute for Fiscal Studies. “It would already mean big cuts in other areas of spending.”

Meanwhile, Yes, whose portfolio includes around 300 pubs across southern England, said business owners were panicking. They’re getting insane figures quoted for next year’s utility bills, if they can find suppliers at all. Nick McKenzie, president of the Greene King pub chain, said one of the locations he works for has reported energy costs at it Jumped by £33,000 ($38,167) per year.

“It’s really daunting for a lot of companies, especially the ones that have come through Covid in a weakened state,” McTaggo said. “They are now struggling to deal with yet another once-in-a-lifetime disaster.”

A collapse in sterling could exacerbate problems, making it more expensive to import energy and other goods, leading to higher inflation.

Overlapping crises

This is not the only reason business owners and investors are increasingly concerned. While job vacancies decreased between May and July, they It remains 60% above its pre-epidemic level. Finding workers to fill open roles has been a particular challenge in the UK since the country voted to leave the European Union. according to National Statistics Office.
An information sheet is displayed outside Victoria Underground station in London on August 19, to advise the public on the planned strike.
Brexit also leads to a scramble for trade, particularly with the European Union, the UK’s largest trading partner. Exports and imports will be About 15% less The Office of Long-Term Budget Responsibility predicted what it would have been like if the UK had remained in the EU.
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 situation without causing further turmoil. However, hardline British lawmakers are still pushing for it leave A key part of the Brexit deal Johnson signed with the European Union, which could eventually lead to a trade war with the UK’s largest export market.

“Brexit has happened,” said Turner. “It’s what it is, we all have our own opinions about it.” “But we have to work with it to make it better for us, and I’m just striving to see if there’s any impetus to do that.”

There are no easy solutions

Truss, who is it He is expected to take over From Johnson after his government collapsed under a pile of scandals earlier this summer, he vowed to stimulate the economy with tax cuts. But many economists fear this approach will increase inflation and damage fragile public finances, while failing to put money in the pockets of those who need it most.

“Benefits of cutting [taxes] “It’s going to be largely flowing in people who pay more taxes, which are generally the people with more money,” said Jonathan Marshall, chief economist at the Resolution Foundation.

There is no way for the state to avoid paying huge sums to deal with the energy situation this winter, but targeted measures will be necessary to avoid waste. Freezing gas and electricity prices during the next two winters may cost the government More than 100 billion pounds sterling ($116 billion), according to researchers at the Institute of Government.

“Energy is expensive, gas is expensive,” Marshall said. “To avoid freezing people in their homes, it has to be paid for. But the state does not need to pay for it to people who can afford it.”

Secretary of State and Leader of the Conservative Party Liz Truss speaks on stage on August 23 in Birmingham, England.

There are also questions about how the next government will tolerate large-scale economic intervention, especially if cutting taxes – and thus government revenues – is the priority.

UK government borrowed heavily To provide support during the coronavirus lockdowns. The country’s debt is almost now 100% of its GDP. When interest rates were at their lowest, and access to cash was cheap, this was not a big deal.

But this is no longer the case. The Bank of England has been aggressively raising interest rates while trying to rein in inflation. This will make servicing its debt increasingly costly for the government. The UK also issued a large number of inflation-linked bonds, adding to its vulnerability.

“It’s the perfect mix of challenges that make public finances look at risk in a way they haven’t been lately,” said IFS’s Zaranco.

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