Rishi Sunak is tearing up ‘Trussonomics’ (Victoria Jones/PA)
(Picture: PA Wire)Rishi Sunak arrived into office, at age 42 years and 163 days, as the youngest PM since Robert Jenkinson, 2nd Earl of Liverpool in 1812 who was age 42 and one day. Rishi got there based on the votes of 357 Tory MPs.
The cost of borrowing fell on the news which is good. But after initially rising to $1.14 the pound fell back to just under $1.13 by the end of the day. The honeymoon period probably lasted less than the day. Further judgment of the markets is going to come quickly.
On the same day the new PM took office after the previous one who lasted 45 days, the much-watched Purchasing Manager’s Composite Index was published suggesting that the UK had already entered recession. Both services and manufacturing were in negative territory. This followed data releases over the prior few days from the ONS showing that retail sales had fallen 1.5% in September compared with August while GDP fell by 0.3% in August alone. Plus, now mortgage lenders have withdrawn mortgages for first time buyers. A collapse in the housing market is inevitable. Recession is going to last a while and inflation which has already peaked, will plummet as the big base effects drop out.
None of this is good news.
Sunak did warn, as I did in the pages of this newspaper, that Trussonomics was going to be a disaster and it wasn’t going to work and it didn’t. It crashed the bond and foreign exchange markets, nearly wiped out the UK pension sector and resulted in mortgage firms withdrawing their products as they were unable tom price them. All of that in two business days. A day is a long time in economics.
The Tory Party brought this on themselves and Boris’s dash in vain from the Dominican Republic added to the sense of a political party in freefall. The Tories are now so far behind in the polls that they would be wiped out at a General Election. Sunak is going to have to pick up the pieces. He also is going to have to calm the markets by ensuring his dysfunctional party is behind him and not fighting like ferrets in a sack. Good luck with that.
The question is whether Sunak, who has been in parliament seven years and only two in a senior position can calm nerves. He was caught up in Partygate and the issue of the non-dom status of his wife caused difficulties. It seems Truss may well have permanently nixed the possibility of a US trade deal.
Sadly, the experiment in trickledown economics has permanently damaged the UK and made it harder for Rishi to get things back to normal. Trussonomics increased the cost of borrowing and the country’s reputation in the world, and reduced the outlook on the UK’s credit rating: this is the so-called ‘moron premium’. Why would companies invest in the UK when they see such disarray? Everyone is poorer because of Truss.
Then there is who is going to be Chancellor? It looks like Hunt who has clearly received a no win, poison chalice will keep the job. There sre no other obvious contenders. How is he going to pay for the energy price guarantees without a windfall tax on the energy companies and maybe even the banks? Is he really going to go ahead with reckless spending cuts given that spending has already been cut to the bone by Osborne? Will Hunt agree to the triple lock on pensions and allow pensions to rise with inflation? There will be much dissent if he doesn’t.
In a recession the right course of action is to cut interest rates and increase public spending and cut interest rates. This brought the UK rapidly out of recession in 2009. This is what is needed right now. It seems Sunak is set to do the exact opposite as are Bailey and his chums at the BOE.
The biggest concern for Sunak is that the bond vigilantes are going to come after him too if the public finances collapse as they tend to do in recessions. Liz Truss may well not be the only one having to do screeching handbrake U-turns, and soon.
