With many nations in the midst of a global economic downturn, the UK faces a pivotal few months ahead.
With inflation soaring to 10.1 per cent, 0 per cent growth predicted for 2023 and the cost of living continuing to rise, the Bank of England’s monetary policy committee recently voted 8-1 to increase interest rates by 0.5 percentage points.
With the BoE’s base rate set at 1.75 per cent, the central bank’s actions are in keeping with similarly aggressive policymaking by the US Federal Reserve and the European Central Bank.
Revised economic forecasts in recent months show that the UK has a particularly difficult time ahead. Policymakers are currently predicting that the UK will enter a 15-month long recession later this year and GDP will shrink by more than 2 per cent, while the US and eurozone will grow by 1.5 per cent and 1.7 per cent respectively in 2023.
What’s causing the downturn?
One of the root causes of the impending recession is inflation, which has been stoked by rising household bills in the UK. Global supply chains, which have been in disarray since the beginning of the pandemic, have been exacerbated by conflict between Russia and Ukraine.
Consequently, fuel and food prices have risen while consumer and business spending power has declined. With less money circulating around the economy, it is beginning to stall.
To curb inflation, central banks are customarily embarking on an interest rate hiking cycle. However, according to a recent survey commissioned on behalf of HYCM, 50 per cent of investors are concerned that these hikes will not be enough to bring inflation to heel.
Of course, there are a number of political factors at play that could also shape the impact and longevity of the recession. Since Boris Johnson’s resignation last month, very little action has been taken to overhaul government policy due to the political stalemate within the Conservative party.
Inevitably, the future of the British economy depends on the policies of the next prime minister.
According to that same HYCM survey, investors are currently showing a slight preference towards former chancellor Rishi Sunak, whose approach to monetary policy suggests he is keen to maintain the current Bank of England mandate.
While this approach is no doubt proving popular with investors who prefer to preserve the status quo, a smaller portion of investors (31 per cent) who favour Liz Truss as the next prime minister could be met with a radical shift in monetary policy.
Truss argues that the BoE’s current approach will not deliver the growth that the British economy needs to navigate its way out of a recession, which has been a real point of contention in the leadership bid thus far.
What actions are investors taking?
With economic policy one of the biggest differentiators between Sunak and Truss, UK investors may be finding themselves at something of a crossroads as the leadership contest plays out.
