TRUSS FORCED OUT BUT HER SUCCESSOR WILL FACE THE SAME ECONOMIC AND POLITICAL PROBLEMS

TRUSS FORCED OUT BUT HER SUCCESSOR WILL FACE THE SAME ECONOMIC AND POLITICAL PROBLEMS

This week saw the conclusion to one of the most remarkable chapters in Britain’s political history. The end of Liz Truss’s premiership sadly does not mean an end to the instability she wrought on both the currency and bond markets. We now have a leadership election and, with no obvious unifying candidate in sight, the core problem of the disconnect between a sizeable chunk of MPs, the party membership and reality remains. This has so far finished off four prime ministers and there is little to suggest it won’t be fatal for a fifth.

Elsewhere we see many of the same difficulties manifesting themselves globally. External shocks like Covid, Ukraine and energy have caused inflation to go up a lot and central banks will ultimately need to cause a recession to bring it down. This means for the next few years there will be no convenient bond buying program that will allow governments to ignore their fiscal problems, although they will likely return eventually. While all nations will struggle to manage these difficult times, it would certainly help if the government wasn’t actively trying to make things worse.

UK: HUNT SHREDS MINI-BUDGET TO TRY AND RESTORE CONFIDENCE

Jeremy Hunt acted swiftly to try and restore confidence in the government after the disruption caused by former chancellor Kwasi Kwarteng’s unfunded mini- budget. However, his intervention has not proved enough to save Liz Truss. The new chancellor has scrapped most of the tax cuts proposed by Kwarteng, including the reduction in the basic rate of income tax and the reduction in corporation tax. Hunt said the measures should raise £32bn of the £45bn it was estimated the mini-budget would cost.

Sterling climbed back to $1.14, although it has since retreated to $1.12. Government bonds rallied and the yield on 10-year gilts dropped to around 4% on Monday. However, the chancellor has a lot still to do to repair the damage done by the mini-budget as 10-year gilts were yielding less than 2.5% two months ago and sterling was trading at $1.18 in mid- August. The modest recovery has not been enough to allow Liz Truss to stay on as prime minister.

INFLATION: CPI DRIVEN BACK ABOVE 10% BY SOARING FOOD PRICES

Inflation has returned to the highest level in 40 years as rising food costs pushed the Consumer Prices Index back to 10.1% for the year to September. Housing costs, including energy, and petrol and diesel costs have driven the increase. Core inflation, excluding volatile items such as fuel and food, also rose as it hit 6.5%. Inflation in the Eurozone also picked up pace. CPI in the Eurozone was 9.9% in September, up from 9.1% in August, although core inflation of 4.8% remains below the rate seen in the UK.

Higher inflation has focused attention on the Bank of England interest meeting in early November as well as the next meeting of the European Central Bank. Recent comments from BoE governor Andrew Bailey and chief economist Huw Pill implied large rate hikes would be needed to deal with additional inflationary pressure from the now mostly-abandoned mini- budget. This led to speculation that the next hike could be as high as 1%. However, deputy governor Ben Broadbent said market expectations for interest rate hikes are overdone.

EQUITIES: BIG BRANDS CONTINUE TO PASS RISING COSTS ON TO CONSUMERS

Inflationary pressures are being felt by consumer goods producers around the world as Nestle and Procter & Gamble reported some shoppers are beginning to curb their spending or search for cheaper alternatives. Procter & Gamble has increased prices by 9% in the year to September while Nestle reported average price increase of 7.5% and warned that further prices increases are to follow.

Consumer confidence remains at all time lows in the UK and Europe. Although consumer spending is holding up better than expected, disposable income has dropped to levels last seen in the first Covid lockdown. Big brands are reporting that most consumers are so far unaffected by price rises but sales are beginning to decline. PepsiCo has increased prices by 17% this year with only a small drop in sales volumes, and Unilever has previously reported robust demand despite price hikes. Procter & Gamble expects sales volumes to fall by between 1% and 3% this year, compared with a previous forecast of up to 2% growth.