Breaking News
Investing Pro 0
Cyber Monday Extended SALE: Up to 60% OFF InvestingPro+ CLAIM OFFER

U.K.’s New Government Announces Fiscal Contraction as Inflation Soars

www.investing.com/analysis/uks-new-government-announces-fiscal-contraction-as-inflation-soars-200632698
U.K.’s New Government Announces Fiscal Contraction as Inflation Soars
By Darrell Delamaide/Investing.com   |  Nov 23, 2022 05:02AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
GBP/USD
+0.31%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • Critics fault new budget for failure to plan for long-term growth
  • US quiet ahead of Thanksgiving holiday as investors anticipate lower rate hikes
  • ECB policymakers show little enthusiasm for another jumbo rate increase

The new UK finance minister, Jeremy Hunt, presented his long-awaited autumn statement on the budget last week, calling for £55 billion in tax increases and spending cuts even though Britain is already in recession.

It was an effort to reverse the damage from his predecessor’s plan for £45 billion in unfunded tax cuts, which investors greeted in September by selling off UK government bonds and sterling.

Hunt’s effort has kind of worked. The pound has risen to about $1.19, moving up in anticipation of his tighter budget from the low of $1.03 in September. Yield on the benchmark 10-year government bond has moved down below 3.15% after topping 4.5% in those September days.

Michael Saunders, a former Citigroup economist who was an external member of the Bank of England’s Monetary Policy Committee until August, was quick to spot the problem in Hunt’s plan, though.

“I thought the autumn statement just had a massive big hole where a long-term growth strategy should have been,” Saunders told CNBC this week.

But this expert goes on to explain that the government had little choice in the short term, because the economy’s output potential has been permanently weakened by a combination of factors, not the least of which is Brexit.

“A part of the reason why things are so bad is because potential growth is so weak and is expected to be weak,” Saunders said.

“That’s why in the MPC’s view, even though GDP is expected to be slightly below 2019 Q4, they think the economy is in significant excess demand, in other words, has overheated, even with no growth. They think potential output growth for the next few years will be less than 1% per year.”

Hunt’s predecessor, Kwasi Kwarteng, had the right idea in wanting a fiscal stimulus for growth. He made the fatal mistake, however, of underestimating or ignoring market sensitivity to UK deficits.

Hunt’s fix is a bit of smoke and mirrors. Most of his spending cuts will come in 2025, after the general election expected sometime in late 2024. The goal was to show markets the government’s good intentions while shielding consumers from the brunt of fiscal contraction until after the vote.

UK inflation soared to 11.1% in October and Bank of England Governor Andrew Bailey warned that more rate increases would be necessary to bring it under control.

All was quiet on the western front as the United States shut down for the Thanksgiving holiday this Thursday. It is now widely accepted that the Federal Reserve will raise its overnight rate only by 50 basis points (bp) at its mid-December meeting after four 75 bp increases in a row. Depending on how inflation evolves, the Fed could ease even further next year.

Expectations for interest rate hikes at the mid-December meeting of the European Central Bank’s governing council have also been scaled back, with economists counting on an increase of only 50 bp despite ECB's insistence it will proceed with higher rates no matter how much it hurts.

In fact, recession fears are beginning to get the upper hand. Although a ferocious hawk-like Austrian central bank governor Robert Holzmann is pushing for the third 75 bp hike in a row, other policymakers are less enthusiastic.

The dovish head of Portugal’s central bank, Mario Centeno, said on Monday that even though the ECB needs to bring inflation under control, he sees a good chance that an increase of less than 75 bp could be in store for December.

ECB chief economist Philip Lane, another dove, also said on Monday that the central bank could continue raising rates into next year, but increases could well be smaller than the last two.

European inflation in October was 10.6% after the preliminary reading of 10.7% was revised downwards last week. Lane said that after the ECB has raised rates 200 bp over the past three meetings, there is little impetus for another huge hike.

U.K.’s New Government Announces Fiscal Contraction as Inflation Soars
 

Related Articles

U.K.’s New Government Announces Fiscal Contraction as Inflation Soars

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Ken Roth
Ken Roth Nov 23, 2022 8:19AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Its easy for Sunak to say that brexit has nothing to do with UKs current economic contraction when you have 1 billion pounds in the bank and will only benefit from less regulation. It is time for the brittish people to face the realities and create a new vision for uk that involves reentering EU. Just look at northern ireland that have not suffered eaually as england and scotland because northern ireland are still part of EU
David Stevenson
David Stevenson Nov 23, 2022 8:19AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Why should the UK join a failing organisation like the EU
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email