What next for UK economy as Boris Johnson quits?

View of 10 Downing Street, where British Prime Minister Boris Johnson is expected to address London, Britain, July 7, 2022. REUTERS / Henry Nicholls

LONDON, July 7 (Reuters) – The resignation of Prime Minister Boris Johnson exacerbates the uncertainty surrounding the British economy, which has already been hit by double-digit inflation risks, the risk of a recession and Brexit.

The race to replace Johnson, who announced his resignation Thursday, could take weeks. This could leave the world’s fifth-largest economy at increased risk at a time when sterling is about to fall for two years against the dollar and the Bank of England is in danger of raising interest rates without hurting economic activity.

The length of the Conservative Party leadership competitions varies. Theresa May needed less than three weeks to win after David Cameron resigned in 2016 while other competitors resigned.

But it took Johnson two months to become the new president in May after he announced his intention to resign in 2019.

At least half of the twelve are expected this time. read more

Below is a summary of the key questions that are being asked about the British economy as the political drama unfolds.

INFLATION

Despite surpassing many other countries, Britain is experiencing a 9.1% annual inflation rate threat. The BoE expects it to rise 11% by the end of this year.

The International Monetary Fund said in April that Britain experienced a steady rise in inflation, and slower growth than any other economy in 2023.

Sterling’s recent fall has increased inflation pressure since then, although hopes for higher spending or tax cuts to boost the Conservative Party’s economy rose sharply Thursday.

But anyone who replaces Johnson can do more to address the problem of global energy and food prices.

MONEY SYSTEM

Anyone who wins Johnson should make big decisions on taxes and finances that can reduce the risk of a recession and could increase the temperature of the economy.

After leaving the finance ministry on Tuesday, Rishi Sunak said he did not agree with the deal with Johnson, who had long pressured him to cut taxes. The immediate need for Sunak before retiring was to reduce British debt, which jumped more than £ 2 trillion on the coronavirus epidemic.

Investigators at the US bank Citi say they hope that opponents of the Conservative Party leadership Priti Patel and Liz Truss, Johnson’s interior and foreign ministers, may call for a slowdown in tax cuts and spending, while Sunak and former health minister Sajid Javid may be many. money lovers.

The long-term consequences of their choices will be huge.

Britain’s budget watchdog said on Thursday that debt could triple to about 320% of GDP in 50 years if future governments do not tighten monetary policy. read more

BREXIT

Six years after Britain voted to leave the European Union, London and Brussels remain embroiled in controversy over Johnson’s re-enactment of the rules – which he agreed to in 2019 – on trade in Northern Ireland.

The possibility of a good relationship with the EU under the new prime minister has led economists to record strong British stocks and currency even though any changes in trade relations may be minimal.

In addition, some potential replacements for Johnson, especially Foreign Minister Truss, have openly supported his anti-EU views.

BANK OF ENGLAND

Britain’s largest bank has raised interest rates five times since December, their highest increase in 25 years, and has shown that it will continue to increase, by about half a percent at its next meeting in August.

But the risk of a global economic downturn has recently reduced bets by investors on this type of BoE move. Uncertainty over Britain’s economic system could give another reason for warning.

A LOT OF POLITICAL THINGS?

Although Johnson’s departure completes another chapter at a critical time in modern British history, it remains to be seen whether his successor will be able to calm down.

Kallum Pickering, an analyst at Berenberg, said Britain’s economy would benefit if Johnson were replaced by a “diligent and diligent man”.

But Citi experts say they doubt the various Conservative Party parties can work together in a transparent way.

“In the coming months, we see the UK moving into a one-time-in-a-lifetime transition, there is no clear path, and we are facing major state divisions. Therefore, the risk of serious wrongdoing is very important,” he said.

“The by-elections should not be reduced, although we are still looking forward to the race in 2024.”

Author William Schomberg Edited by Mark Heinrich

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