Strategy blog: UK – another new PM
Markets' indifference to the news that the UK is to have another new Prime Minister – apparently quite quickly, though the exact selection process is not yet clear – suggests that it was perhaps not unexpected. The Chancellor remains in place and seems reasonably sensible, and the next Prime Minister, or the one after that, is likely to be better advised than the last one. An early general election still seems unlikely, which suggests a degree of investor-reassuring continuity may yet break out, for a few weeks at least.
We often suggest that the capital markets are capable of callously shrugging off all sorts of important political and humanitarian issues if there is no significant read-across to interest rates or corporate profitability. With monetary policy taken care of by the independent Bank of England – whose credibility will improve – and little prospect of renewed fiscal excitement, this could be one of those occasions. If it were indeed important rather than routine, that is.
Meanwhile, we read that the budget is still scheduled for October 31st. In recent days it has seemed as if the members of parliament sitting on the government benches, egged on by the economics establishment, is intent upon not just rowing back as much of the Truss/Kwarteng disbursements as possible but going further, towards Austerity Mk II.
This is surely unnecessary. Even the staunchest inflation hawk would accept the political imperative of giving hard-pressed households and businesses a net boost in the face of surging energy bills. In late 2020 the OBR signed off a prospective borrowing requirement of almost £400bn, and a prospective 2025 debt ratio of roughly 110% of GDP. This spring they suggested that the deficit had fallen faster than expected, and the 2025 debt ratio was projected to be almost 20 (not a typo) percentage points lower. A temporary rebound in the deficit now (to £250bn?), and an increased profile for debt (100% in 2025?) is eminently affordable. Gilt yields were trending higher primarily because economic capacity is more fully utilised than it was and inflation has surged (again, not that big a surprise), but they are still unremarkable, especially in real terms, and have actually fallen back a little in the last fortnight.
We suggest the estimated cost of that energy support may turn out significantly lower than initially feared. Natural gas prices have bounced, but remain roughly half what they were when the Truss administration costed its plans.
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