UK's political convulsions set to prolong market turmoil
Global investors have been following the chaos and confusion on the UK’s political scene, looking for signs of stability. It remains to be seen whether Rishi Sunak, the new leader of the Conservative government, will be able to deliver that.
The current consensus in Asia is that the new prime minister will fail to persuade markets that the UK is on the right path to economic recovery.
Reflecting negative sentiment expressed last week by the markets – and by credit rating agency Moody’s, which changed its outlook on the UK from stable to negative – Asian institutions are not at all positive.
“Foreign investors, including those from Asia, are likely to be deterred by the recent political and financial market instability from increasing their investments in the UK,” Mansoor Mohi-uddin, chief economist at Bank of Singapore told AsianInvestor.
STABILITY IN FOCUS
Sunak will look to prioritise economic and market stability in his first days as prime minister ahead of another mini-budget on October 31.
He will face a challenge to achieve it, given that business confidence is at rock bottom. Richard Burge, head of the London Chamber of Commerce and Industry, said: “British businesses are trading in the worst economic climate in decades.”
Public sector net borrowing was £20 billion ($22.7 billion) last month, £2.2 billion more than in the same month last year, and the second-highest September borrowing figure since monthly records began in 1993, according to data published by the Office for National Statistics last week.
“Significant challenges remain for the UK, including how the Bank of England responds to this period of chaos while trying to lower inflation, which in September hit a 40-year high,” said Azad Zangana, a senior economist and strategist at Schroders.
“The Bank of England may still hike 100 basis points in November, given 40-year high inflation. The UK budget deficit is still set to exceed 5% of GDP. The current account deficit is a huge 8% of GDP, and we forecast the UK will contract by 0.8% in 2023,” Mohi-uddin said.
Sunak’s biggest challenge, though, may be to unify his party. Failing to do so will place further strain on the British economy and financial markets.
“The risks are that a new PM will struggle against old challenges,” Mohi-uddin said. “We keep our forecast for the pound to fall back to $1.04 against the US dollar.”
UNSURPRISING TRUSS EXIT
For investors, short-lived prime minister Liz Truss’s resignation was largely expected, Zangana said.
“Her low-tax, libertarian, post-Brexit vision for the economy came to a crashing halt when it was met by the forces of reality and markets,” he said. “Investors were unwilling to allow her and her first chancellor, Kwasi Kwarteng, to borrow hundreds of billions of pounds at a time when interest rates were rising.”
Truss tried to blame the abject failure of her economic policy on the war in Ukraine, an argument that few would find credible.
Nonetheless, it’s true that Russia’s invasion of Ukraine could cause a sudden repricing of risk and a deterioration in global financial conditions, as described by the International Monetary Fund in its latest global financial stability report, issued last week.
“This could have significant ramifications for emerging market economies,” the IMF report said.
“In the face of tighter global financial conditions, investors have already retrenched from emerging market economies, with outflows from equity and bond markets totalling $69 billion since the beginning of 2022. A disorderly tightening in global financial conditions could trigger further fund outflows and a worsening of financial conditions in these economies.”