Challenge for PM

Sunak test as UK braced for ‘deep recession’

Rishi Sunak on the steps of Conservative HQ following his victory

Britain’s new Prime Minister is facing a “deep recession” as UK business activity shrinks to levels last seen in January 2021 when the country was paralysed by lockdown.

The private sector economy, as measured by the S&P 500 purchasing managers’ index, contracted sharply this month and will suffer a further hit if the Bank of England raises interest rates as expected next week.

In his first address as PM, Mr Sunak said he would aim to bring “stability and unity”, possibly an indication that he will not support calls for a general election.

However, he also gave hints of continuing discord in the party after appearing to snub former Health Secretary Matt Hancock who stood in line with well-wishers waiting to greet him at Conservative HQ.

As he worked along a line of MPs including Mel Stride and Guy Opperman, Mr Sunak seemed to deliberately blank Mr Hancock and move on to shake hands with party chairman Jake Berry. He and Mr Hancock had worked closely together on the pandemic response until the Health Secretary was forced to resign after breaking the government’s strict distancing rules.

As Mr Sunak moves into Number Ten, attention will quickly turn to the management of the economy and the public finances, and whether he confirms Jeremy Hunt as Chancellor. He is expected to deliver the fiscal plan next Monday.

The markets responded positively to Mr Sunak’s victory after his only remaining rival, Penny Mordaunt, withdrew just before the deadline for nominations. The FTSE 100 index closed 44.26 points higher at 7,013.99, while government borrowing costs had already fallen as yields on long-dated gilts dropped.

However, the economic signals are generally weak with inflation and energy bills still high. The Bank of England has been giving mixed signals on how sharp the rise in interest rates may be.

empty shops in Glasgow
Britain is poised for a slowdown (pic: Terry Murden)

Ms Mordaunt pulled out of the leadership race just minutes before the 2pm deadline and issued a statement saying MPs had “taken this decision in good faith for the good of the country”.

Mr Sunak, 42, who had secured nominations from more than half of Tory MPs, becomes Britain’s first non-white Prime Minister and the youngest since the Napoleonic Wars.

He was the only candidate to reach the nominations threshold of 100 MPs to enter the leadership race. It was his second bid for the job after being defeated by Liz Truss last month. His election this time was made easier after former Prime Minister Boris Johnson withdrew last night.

He is expected to meet the King on Tuesday after which he will address the nation from Downing Street and announce his Cabinet, with speculation that Ms Mordaunt may be offered Foreign Secretary. Suella Braverman, Michael Gove and Dominic Raab can expect to return. There may be a question over Jacob Ress-Mogg continuing in the business department after he came out in support of Mr Johnson.

The new occupant of Number Ten faces some stiff challenges, not least on the economic pressures facing businesses and households.

The latest S&P Global/ CIPS flash UK composite purchasing managers index (PMI) fell to 47.2 in October – the lowest reading since the 2009 financial crisis, excluding lockdowns. Anything below 50 indicates contraction.

Demand for products and services continued to weaken as households rein in spending, with new orders falling at the sharpest rate since the start of 2021.

Services firms, which generate around two thirds of the UK’s economic output, are particularly badly hit from consumers cutting back in response to soaring inflation.

The sector, which includes hospitality firms like restaurants and pubs, saw output decline for the first time in 20 months and at the fastest pace since January 2021.

Manufacturers’ saw a sharp slump in output and new orders, exacerbated by the fastest downturn in exports for nearly two-and-a-half years.

Companies also reported a steep fall in business expectations, with optimism hitting the lowest level since April 2020.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the UK economy was ‘certain’ to contract in the last quarter.

“The heightened political and economic uncertainty has caused business activity to fall at a rate not seen since the global financial crisis in 2009 if pandemic lockdown months are excluded,” he said.

“GDP [gross domestic product] therefore looks certain to fall in the fourth quarter after a likely third quarter contraction, meaning the UK is in recession.”

Martin Beck, chief economic adviser to the EY Item Club, the forecasting group, said: “More evidence of economic weakness, combined with signs of less heated inflationary pressures, should, all else (being) equal, tone down the MPC’s appetite to raise interest rates substantially in its November meeting.

“The reversal of almost all the mini-Budget’s tax cuts and the possibility of further fiscal tightening in the forthcoming fiscal statement point in the same direction.”

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