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UK economy: Boris Johnson leaves mess for successor to fix

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UK economy: Boris Johnson leaves mess for successor to fix

But his popularity outside parliament has also been severely damaged by soaring inflation and a stagnant UK economy, a cost of living crisis that could push millions into poverty this winter and the risk of a damaging trade war with the EU.

British stocks rose on reports that Johnson was preparing to exit, with the pound up 0.75% to $1.20, recovering slightly from a two-year low hit earlier in the week.

“But don’t get me wrong, [pound] The UK economy remains severely weak as it underperforms its peers, [and] A recession is likely,” Walid Koudmani, chief market analyst at brokerage XTB, wrote in a note to clients.

The UK has the highest inflation rate in the G7…

Every major economy has suffered from the lingering effects of the pandemic on supply chains, as well as the hit to energy and food costs caused by Russia’s invasion of Ukraine in February.

But the UK is in worse shape than most of its peers. Inflation hit a 40-year high of 9.1% in May, the highest level among the major G7 economies – and is expected to climb above 11% later this year despite a series of rate hikes.
The knock-on effects of Brexit – Johnson’s signature achievement in government – have exacerbated severe labour shortages and increased operating costs for businesses. The fall in the value of the pound this year has also pushed up import costs.
Rising food and fuel prices have created the worst cost-of-living crisis in decades, forcing low-income households to choose between “heat and eat,” a rallying cry from anti-poverty activists as they demand more government support.

Johnson’s government has pledged £400 ($502) in grants to every household to help millions of people struggling to pay their energy bills. It also bowed to pressure last month, announcing a 5 billion pound ($6.3 billion) tax on windfall profits from oil and gas companies.

But those efforts are being swallowed up. Disposable income is on track for its second-biggest fall since records began in 1964, driven by soaring energy and food costs, according to the Bank of England. These bills will get worse.

The average annual energy bill for a household could increase by about 50 percent to £3,000 ($3,600) this winter, when the cap on the maximum price suppliers can charge customers is revised in the fall. Regulators had already raised the cap by 54% in April.

British households are particularly affected by the continued decline in living standards. The Resolution Foundation said Monday that typical wages today are no higher than they were before the 2008 financial crisis.

Adam Corlett, the foundation’s chief economist, said: “The UK’s recent poor record in terms of living standards – particularly the complete collapse in income growth for poor households over the past 20 years – must be reversed over the next decade. ”

And is heading towards the lowest growth…

Without stronger growth, this decline in pay will not be reversed. And that’s very unlikely in the short term. Around the world, a once-strong recovery is being dragged down. But the UK is in particularly bad shape, with a recession looming.

The world’s fifth-largest economy came to a standstill in February and started shrinking in March. The decline accelerated in April, when GDP fell an estimated 0.3%, and all three major economic sectors — services, manufacturing and construction — regressed, according to the National Bureau of Statistics. Retail sales fell for the second straight month in May.

There’s more bad news ahead. In a report on financial stability released earlier this week, the Bank of England said the outlook for the UK economy had “seriously deteriorated”.

The Paris-based Organisation for Economic Co-operation and Development predicted last month that the UK economy would come to a standstill, with zero GDP growth forecast for 2023. This will be the worst performer in next year’s G7.

Weak growth is bad news for government debt, which has soared to more than 90% of GDP thanks to measures to help businesses and households navigate the pandemic and energy crisis.

The government’s fiscal watchdog, the Office for Budget Responsibility (OBR), said on Friday that pressures from an ageing population and Britain’s public debt “are on an unsustainable path and are expected to exceed 250% of GDP in the long term”.

That means there is little room for the next prime minister to slash taxes or make spending pledges.

The OBR added: “This all presents a challenging outlook for this and future governments as they steer the UK economy and public finances for years to come.”

…while Brexit has yet to deliver

Johnson has succeeded where his predecessor Theresa May failed by “getting Brexit done”. But the break with the EU has not boosted trade as he and other Brexit advocates have promised.

The OBR concluded in March that Britain had missed out on much of the recovery in global trade since the pandemic.

For many businesses, the tariff-free trade deal Johnson signed with EU leaders less than two years ago has led to a massive increase in customs paperwork, making it harder for them to sell to their biggest export markets and increasing import costs. Agreements signed with other countries have done little to no avail.

“While additional trade with other countries could offset some of the decline in trade with the EU, none of the agreements reached to date have been large enough to have a significant impact on our forecasts,” the OBR said.

Britain’s balance of payments deficit soared to 8.3% of GDP in the first quarter of 2022, official data released last week showed, meaning the country has had to rely more on foreign investment to make up for the fact that it imports far more. more than its outlet.

Against that backdrop, the pound has been battered this year, and Johnson’s threat to tear up part of the Brexit treaty he signed did not help. That has poisoned relations with EU leaders and prompted retaliatory rhetoric that could escalate into a trade war that could hurt the UK the most.

“Judging from the early lineup of potential successors to Johnson, the balance of potential outcomes will be skewed towards a less tense relationship with the EU,” Berenberg’s Callum Pickering noted.

“Even the zealous Brexiteer candidates…are less populist than Johnson. This suggests that while it is unclear whether the UK’s relationship with the EU will improve a little or a lot, the overall picture will be much calmer.”

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