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Boris Johnson goes, and strategists bet on big changes in the UK economy

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British Prime Minister Boris Johnson makes a statement in Downing Street in London, UK, July 7, 2022.

Henry Nicholls | Reuters

LONDON – The eventual successor to British Prime Minister Boris Johnson is likely to bring more fiscal support and less strained relations with the European Union, economists say.

Johnson formally resigned as Conservative Party leader on Thursday, but said he would remain in Downing Street until a successor is chosen – despite many calling on him to resign immediately and allow a less controversial ‘conservator’ take over the helm in the meantime.

Exactly when a new leader will be appointed is unclear, but reports suggest the aim is to confirm one before the Conservative Party conference in October. According to British bookmakers, 11 hopeful candidates were in the running to replace Johnson with Rishi Sunak, Penny Mordaunt and Liz Truss as favorites on Monday morning.

The Prime Minister’s impeachment coincides with a particularly dangerous period for the British economy. Inflation hit a new 40-year high of 9.1% in May as rising food and energy costs increased the country’s cost of living.

Meanwhile, the economy contracted unexpectedly in April to mark the first consecutive contraction in GDP since the start of the Covid-19 pandemic – and the UK is widely tipped to experience a technical recession in the second half of the year.

The Office for Budget Responsibility, the UK’s independent tax body, has projected that real disposable income will fall by 2.2% this fiscal year (2022/2023), the biggest annual decline since registration began as purchasing power of households persists.

In addition, uncertainty over the duration and outcome of the conflict in Ukraine is likely to negatively impact investment and export performance through secondary effects on the growth prospects for the EU, the UK’s main trading partner, said Boris Glass, senior UK economist. at S&P Global Ratings.

“Given the aforementioned inflationary pressures, the Bank of England (BOE) tightening monetary policy and no end in sight for the conflict between Russia and Ukraine, we expect UK growth of 1% by 2023, its lowest rate among the G-7 countries.”

Tax support

Former Treasury Secretary Rishi Sunak, whose resignation was one of two leading to the eventual end of Johnson’s tenure, has announced a series of measures over the past six months in an effort to combat the cost of living crisis, including a windfall on oil and gas majors and a one-off payment to 8 million lowest-income households.

However, economists generally expect the candidate taking over the reins from Johnson to raise the bar on fiscal support for the ailing economy.

Modupe Adegbembo, G-7 economist at AXA Investment Management, said a key question is whether Johnson is using his “concierge” period as prime minister — if he gets one — to push through a short-term fiscal policy.

“However, if a new prime minister is appointed, we see a greater chance of additional fiscal spending and/or tax cuts,” Adegbembo said in a note on Thursday.

“The potential to accelerate income tax cuts planned for 2024 may be mooted by some candidates, although it remains challenging in light of public finance developments.”

Her comments were shared by strategists at UBS, who said a change in leadership makes further fiscal support more likely as a new prime minister “wants to prove himself”.

“Any additional support for the UK economy would come at an opportune time: the GDP growth estimate for March was -0.1% compared to February and for April it was -0.3% compared to March,” said the team at UBS CIO Mark Haefele in a note. Friday.

“A further hike in the energy price cap means there is further pressure ahead, but while our baseline scenario is that the UK will narrowly escape recession, it’s important to remember that the FTSE 100 only accounts for 25% of its revenues within the VK generates”

As such, large cap UK stocks are not particularly sensitive to domestic economic growth and are benefiting from the pound’s weakness; many FTSE 100 companies make profits in dollars, which therefore strengthen as the pound weakens against the dollar.

Strategists at asset manager Invesco agreed, stressing that as long as sterling remains weak, investors may have opportunities to pick up “high-quality, international companies at a double discount.”

Sterling rose fractionally after Johnson’s resignation, but gave back those gains and then some on Friday as global pressures continued to weigh on the pound. The FTSE 100 has remained largely impervious to political turmoil and is tracking gains across Europe.

UBS also noted that high exposure to both commodity-related and value sectors – stocks that typically trade at a discount to their fundamentals – has recently supported the UK market, making it one of the preferred stock markets of the UK. Swiss bank made.

“The immediate outlook will likely depend on whether Johnson manages to stay on for the next two months – in which case markets risk a period of additional volatility into the summer,” said AXA IM’s Adegbembo.

“However, if Johnson were replaced by another ‘concierge’, the prospect of domestic policymaking would diminish, something which should reduce expected volatility.”

The Brexit problem

No clear frontrunner has emerged to take the lead from the Conservatives, and the field is likely to be crowded and diverse. But even if a new Prime Minister withdraws Downing Street, the approval of a fiscal package to help consumers is not a foregone conclusion.

Invesco suggested that this uncertainty means that the UK economy will continue to “wither” in the meantime, and is likely to experience a recession among developed economies this year.

In addition to global pressures from supply chain problems and the war in Ukraine, the UK is also dealing with the trade and economic fallout from Brexit, which Invesco’s multi-asset team said has fueled the inflationary fire on the food and fueled energy bills.

“It is difficult at the moment to be more constructive about the UK economy. Not only are economic fundamentals weakening, but the high risk of a policy error is significant,” said Invesco strategists.

“Given the current pressure, we think it has become even more difficult for the government to unite around a clear strategy for the future.”

Despite being elected in 2019 on a pledge to “get Brexit done” and praising his “oven-ready” exit deal with the European Union, Johnson’s government continued to argue with Brussels over the workings of Northern Ireland’s protocol, a key principle of the Withdrawal Agreement signed by both parties.

S&P Global’s Glass suggested that a new administration could try to restore relations with the EU by taking a more conciliatory approach to trade relations, but this outcome is far from guaranteed given the broad views within the Conservative Party.

“Judging by the early lineup of potential successors to Johnson, the balance of potential outcomes would tip towards less tense relations with the EU,” said Berenberg Senior Economist Kallum Pickering.

“Even the ardent Brexiteer candidates (Penny Mordaunt and Liz Truss) are less populist than Johnson.”

Reason for long-term optimism?

Over time, less tense relations with the EU may also prove to be a catalyst for stronger business investment, giving the pound a sustainable path towards a fair value of 1.40-1.45 against the dollar and 1.20 -1.25 against the euro, Pickering suggested.

“Looking further afield, a Conservative leadership election followed by a quick election during the new leader’s honeymoon phase is not inconceivable before the end of 2022 or early 2023. Both Johnson and May took the UK to the polls shortly after becoming Conservative leader,” he added.

However, aside from the immediate political volatility, Glass argued that the UK continues to benefit from “strong institutional settings and credible monetary policy”.

The Bank of England has begun raising interest rates to curb inflation, and S&P Global believes consumer prices will gradually be brought under control by mid-2024.

In addition, despite a deterioration in the macroeconomic outlook, public finances have generally stabilized, with public net debt projected to fall to 94% of GDP in 2025, from 96% at the end of 2021, Glass said.

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