ReportWire

Tag: Liz Truss

  • The British pound has taken a tumble. What’s the impact?

    The British pound has taken a tumble. What’s the impact?

    [ad_1]

    LONDON (AP) — The pound is taking a pounding.

    The British currency has taken a plunge, sliding against the U.S. dollar to touch an all-time low. It’s a sign of the alarm in financial markets over new Prime Minister Liz Truss’ emergency budget measures unveiled last week aimed at jump-starting the ailing economy.

    Investors are spooked by a sweeping package of tax cuts likely to cost tens of billions of pounds in extra government borrowing and amounts to a risky gamble to stave off a looming recession.

    But that’s not all. The currency chaos is playing out against the wider backdrop of the dollar’s rally to a two-decade high.

    Here’s a look at what it all means:

    EVERYDAY IMPACT

    Many Britons are struggling amid soaring inflation driven by rising prices for food and energy, in a cost-of-living crisis that’s been dubbed the worst in a generation.

    The pound’s slump threatens to make it even worse. One of the most visible ways is by feeding into the energy crisis because oil and natural gas is priced in dollars. The impact is being felt at the pump.

    British drivers are paying 5 pounds ($5.45) more on average to fill up their cars since the beginning of the year as the pound has fallen, according to an analysis by motoring association AA. U.K. gas prices would be at least 9 pence per liter cheaper if the pound was still at its mid-February level of $1.35, compared with the now-outdated $1.14 level that the group used last week for its calculation.

    “There’s every chance that a falling pound will make life more expensive,” said Sarah Coles, senior personal finance analyst at financial services firm Hargreaves Lansdown. Anything bought from overseas — components, raw materials, supermarket staples and household basics — will be pricier.

    “These rising costs will feed into higher prices, and push inflation even higher,” Coles said. “For anyone whose budget was already stretched to breaking point, this will mean even more pain at the tills.”

    Finance minister Kwasi Kwarteng hopes that big tax cuts will spur economic growth and generate wealth, but the sliding pound raises the possibility that will be offset if the central bank steps in with bigger-than-expected interest rate increases.

    Some analysts are speculating rates could rise as high as 6% by next spring, a sharp contrast to the near zero level they were at just a few years ago. Rising rates mean many homeowners face bigger monthly mortgage bills, leaving them less to spend on other goods and services.

    HOW LOW CAN IT GO?

    Fifteen years ago, 1 British pound was able to buy $2. Now, the pound is getting closer to parity with the greenback, a once-unthinkable event and a psychologically important milestone. The pound has tumbled more than 5% since the government outlined its economic plans Friday, dropping as low as $1.0373 early Monday, before bouncing back to above $1.06.

    The markets are raising the prospect that the two currencies might soon reach equal footing. A lot of the decline has been driven by the strength of the dollar, which has climbed against a wide range of other currencies as the U.S. Federal Reserve aggressively raises rates, drawing interest from investors fleeing riskier assets.

    The euro, for example, has been on a similar trajectory to the pound, having fallen below parity with the dollar recently and then hitting a fresh 20-year low Monday.

    The pound has dropped more than most, though, because of local factors. Investors are alarmed at Kwarteng’s “lack of focus on fiscal prudence,” which outweighs any optimism about his pro-growth, anti-red tape agenda, said Victoria Scholar, head of investment at interactive investor.

    “On top of being bullish towards the dollar, the international investor community is now also very bearish towards the pound amid fears about the UK’s economic outlook and investment case,” Scholar said.

    TUG OF WAR

    The plummeting pound highlights what analysts are calling a “tug of war” between Britain’s Treasury and the central bank, which has independence from the government to operate free of political influence.

    The Truss government is gambling that slashing taxes and borrowing more to pay for it will kick-start economic growth as a recession looms.

    That puts government officials at odds with the Bank of England, where policymakers are trying to rein in inflation that threatens financial stability by raising interest rates, with seven hikes so far this year and more in the pipeline.

    The central bank said Monday that it wouldn’t hesitate to raise interest rates by as much as needed at its next meeting in November, which did little to soothe markets. An interim meeting to decide on an emergency rate hike could be needed, “though that would risk escalating tensions with the new government,” said Jeremy Lawson, chief economist at asset manager abrdn.

    “There are no good options from here, just less bad ones, with the U.K.’s already struggling household and businesses left to pick up the pieces,” Lawson said.

    IS THERE ANY UPSIDE?

    British exports will be cheaper for buyers paying in dollars. But the economic impact is likely to be limited, given that the United Kingdom runs a trade deficit with the rest of the world by importing more than it exports.

    It’ll be a lot cheaper for foreign visitors, especially Americans. Pub beers, theater tickets for shows in London’s West End, and hotel bills will be more affordable for tourists.

    And for investors and wealthy people, the slumping pound makes it cheaper to buy real estate in Britain, especially in exclusive London neighborhoods that have long been favored by the global superrich.

    [ad_2]

    Source link

  • Britain’s ‘profound economic crisis’ gives Rishi Sunak only unpleasant choices | CNN Business

    Britain’s ‘profound economic crisis’ gives Rishi Sunak only unpleasant choices | CNN Business

    [ad_1]


    London
    CNN Business
     — 

    Rishi Sunak, Britain’s third prime minister in seven weeks, took office on Tuesday with a pledge to fix the “mistakes” of predecessor Liz Truss and tackle a “profound economic crisis.”

    The task won’t be an easy one, he acknowledged.

    “This will mean difficult decisions to come,” Sunak said in his first speech from No. 10 Downing Street.

    The United Kingdom was already sliding towards a recession when Truss took office in September, as soaring energy bills ate into spending. Now, Sunak has another headache: He must restore the government’s credibility with investors after Truss’ unfunded tax cuts sparked a bond market revolt, forcing the Bank of England to intervene to prevent a financial meltdown. Borrowing costs, including mortgage rates, shot higher.

    Accomplishing this goal will require delivering a detailed plan to put public finances on a more sustainable path. (A government watchdog warned in July that without major action, debt could reach 320% of the UK’s gross domestic product in 50 years.)

    The problem? There’s little appetite for government spending cuts after years of austerity in the wake of the 2008 global financial crisis. Plus, failing to help households deal with surging living costs could prove politically devastating and further weigh on the economy.

    “It’s not a particularly pleasant economic hand to be dealt [as] a new prime minister,” said Ben Zaranko, a senior research economist at the Institute for Fiscal Studies.

    Finance minister Jeremy Hunt got the ball rolling last week when he reversed £32 billion ($37 billion) in tax cuts that formed the bedrock of Truss’ plan to boost growth.

    Yet Sunak and Hunt — who will stay in his job — still need to find between £30 billion and £40 billion in savings to bring down public debt as a share of the economy in the next five years, according to calculations by IFS, an influential think tank.

    “It is going to be tough,” Hunt said in a tweet. “But protecting the vulnerable — and people’s jobs, mortgages and bills — will be at the front of our minds as we work to restore stability, confidence and long-term growth.”

    Sunak and Hunt won’t have the option of going light on the details. If investors don’t buy into their plan and borrowing costs shoot up again, getting the situation under control would only become trickier, as interest payments on government debt rise.

    “If markets don’t [see] the plans as credible, then filling the fiscal hole could become even harder,” said Ruth Gregory, senior UK economist at Capital Economics.

    One area Sunak may be tempted to tap is the social welfare budget. Questions have swirled about whether the Conservative government may try to avoid boosting state benefits in line with inflation, as is customary. (American recipients of Social Security will receive the biggest cost-of-living adjustment in more than four decades next year.)

    Most UK working-age benefits would typically go up by 10.1% next April based on inflation data. But there’s speculation the increase could be linked instead to average earnings, which are growing at a much slower rate than inflation. That could save £7 billion ($8 billion) in 2023-24, according to IFS.

    Such a move would prove controversial, however — especially since benefits have not kept up with rampant inflation in 2022.

    “I would like to see if we could find a way to increase benefits by inflation, but what I will say is that trade-offs are involved,” former Conservative cabinet minister Sajid Javid told ITV this week.

    A more palatable option, at least for households, would be extracting more taxes from corporations.

    Hunt has already said that corporate taxes will rise from 19% to 25% next spring. The Financial Times has reported that Hunt could also target earnings from oil and gas companies by extending a windfall tax on profits.

    In an interview with the BBC earlier this month, Hunt said he was “not against the principle” of windfall taxes and that “nothing is off the table.” Higher taxes on the financial sector are also under consideration, according to the Financial Times.

    Industry groups are already circling the wagons. Banking trade association UK Finance said its members already pay “a higher rate of taxation overall than any other sector,” and urged the government not to “risk the competitiveness of the UK’s banking and finance industry.”

    Sunak could also walk back Truss’ commitment to boosting defense spending to 3% of the economy by 2030, though that carries its own political risks given Russia’s war in Ukraine. Other countries in the region, such as Germany, have said they will ramp up military investments, and the United Kingdom may be loath to fall behind, Zaranko said.

    Investors and economists expect that the government will announce a mixture of tax increases and spending cuts shortly. Hunt is due to reveal his plans in greater depth on October 31.g

    “Despite the fiscal U-turns, the government will still need to show a fiscally credible path next week in the budget to balance the books,” Sonali Punhani, an economist at Credit Suisse, said in a note to clients this week.

    That could exacerbate the country’s downturn. The Bank of England has projected that the United Kingdom is already in a recession, and a gauge of business activity in October slumped to its lowest level in 21 months.

    “We are seeing quite a dramatic shift in the fiscal outlook from being much looser than we expected just a few weeks ago to being much tighter than we expected,” Gregory of Capital Economics said. “I think the risk is that the recession is deeper or longer than we expect.”

    A weaker economy would present its own complications.

    No one wants to repeat the errors of the brief Truss era, when her gamble that unfunded tax cuts would jumpstart growth backfired spectacularly.

    But business groups are warning that completely abandoning the objective of boosting Britain’s anemic economic growth would create problems, too.

    The austerity of the 2010s produced “very low growth, zero productivity and low investment,” Tony Danker, head of the Confederation of British Industry, told the BBC on Tuesday.

    “The country could end up in a similar doom loop where all you have to do is keep coming back every year to find more tax rises and more spending cuts, because you’ve got no growth.”

    [ad_2]

    Source link