Former finance boss Rishi Sunak becomes UK prime minister, inheriting economy in tatters

The next British prime minister, former chief financial officer Rishi Sunak, inherited a British economy that had been heading into recession even before the recent turmoil sparked by Liz Truss.

Outgoing Prime Minister Truss resigned after its debt-financed tax cut budget shocked the markets, bringing down the pound.

This has forced the government to deploy much of its budget, including cutting the ceiling on soaring electricity bills that have contributed greatly to the cost of living crisis for tens of millions of Britons.

The landfill economy

Data released on Monday showed that the UK economic downturn worsened in October, with private sector output hitting a 21-month low.

“The October PMI flash data showed that the pace of the economic downturn is picking up pace after the recent political and financial market turmoil,” said Chris Williamson, chief business economist at S&P Global Market Intelligence, who helped compile the numbers.

“Heightened political and economic uncertainty has caused business activity to fall at a rate not seen since the 2009 global financial crisis, excluding months of pandemic lockdown.”

Williamson added that the upcoming data is likely to show Britain is already in recession.

Read also: There is a 70% chance of a recession next year, says Franklin Templeton.

The UK S&P Global/CIPS flash composite PMI was 47.2 in October, down from 49.1 in September.

A number below 50 indicates a contraction.

The UK is not alone, however, with anecdotal S&P data pointing to a “looming recession” in Germany, Europe’s largest economy.

“Sunak stability”

Truss resigned last Thursday after serving just 44 days as prime minister. She took over from Boris Johnson on September 6 after a week-long campaign against Conservative rival Sunak.

Read also: WATCH: Wet lettuce will outlast Liz Truss’ tenure as UK prime minister

The former Chancellor of the Exchequer warned in the battle for Johnson’s successor that the tax cut promised by Truss, when the public debt had already risen due to the Covid intervention, was the wrong policy.

He was right, as the budget sent the pound to a record low near parity with the dollar and sent government bond yields skyrocketing.

With Sunak seen as a source of stability in the markets, the pound sterling rose while yields fell on Monday.

“Investors are clearly hoping that Sunak will stabilize the economy and the political situation, although at this point it is difficult to see which is the bigger challenge,” said AJ Bell financial analyst Danny Hewson.

“Apart from the recovery of the pound sterling and the reduction in the cost of government borrowing (as yields fall), Sunak will be pleased with the fall in European gas prices.”

However, with UK inflation at a 40-year high above 10 percent, Bank of England is going to announce another sharp interest rate hike at the next policy meeting next week.

This will put additional pressure on borrowers, including homeowners who are facing rising mortgage rates as a result of a costly government budget.

Need a firm hand

Shevon Haviland, CEO of the British Chamber of Commerce, urged Sunak to also help businesses struggling with huge energy bills.

“The political and economic uncertainty of the last few months has done a huge damage to the confidence of British business and it must now end,” she said in a statement after Sunak’s new position was confirmed.

“The new prime minister needs to have a firm hand on the wheel to see the economy through the difficult conditions that lie ahead.

“It means making plans at full cost to solve the big problems facing the business; skyrocketing energy bills, labor shortages, skyrocketing inflation and rising interest rates.”