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From a Failing UK Economy to Party Rifts: Sunak’s Uphill Battle

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(Bloomberg) — As Rishi Sunak becomes the UK’s third Conservative prime minister within just four months, the role is increasingly looking like a poisoned chalice.

His victory on Monday puts him in charge of an unenviable cocktail of problems including a struggling economy, a long-running energy squeeze and a divided party that’s slumped in the polls.

Gilts rallied on Monday on the news, pushing the 10-year yield to the lowest in almost three weeks, a sign that market confidence could be rebuilt under Sunak’s premiership. But any policy action will be closely watched by a market that has lost faith in the government and is highly sensitive to fiscal change.

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In his first public comments as leader, Sunak called on his party to unite to deal with a “profound economic challenge.” Here’s a list of the many tests that face the newest occupier of No. 10 Downing Street:

Economy:

Sunak takes the reins against a recessionary backdrop and inflation running at a double-digit pace. Surveys on Monday showed private-sector activity shrank in October, another round of bad numbers after weak retail sales last week.

Meanwhile, households are struggling amid a worsening cost-of-living crisis. As prices for goods and services surge more quickly than wages, workers and families are left with less money to spend. Real earnings are down almost 3% in the past year.

Sunak also needs to tread carefully with fiscal measures to avoid detonating another dramatic reaction in the gilt market. The recent market turmoil in the wake of his predecessor’s tax giveaway sent bond yields jumping, with implications for borrowing costs not just for the government, but households and businesses too.

Energy Crisis:

Persistently high energy prices spurred by Russia’s invasion of Ukraine will present a problem to both businesses and households when government support runs out in April 2023.

If prices don’t decline by then, or an alternative energy support package is not put in place, inflation could reach 15% or higher, according to some forecasts. Household energy bills could increase twofold, putting further pressure on incomes at a time the economy is stuck in a recession.

Housing Market:

The relentless rise in mortgage costs is one of the headaches that Sunak will inherit upon taking office. It’s already having an effect on the property market, where demand is slowing sharply and price growth has cooled, particularly in London.

Higher mortgage rates will also squeeze those looking to refinance in the coming year, and Sunak will be under pressure to ease the burden given many households are already under strain from rising energy costs and soaring inflation.

Public Services:

Chronic underfunding and a growing malaise among civil servants and public-sector workers make spending cuts controversial, limiting Sunak’s political headroom.

The UK already saw a wave of strikes throughout the summer — adding to a picture of “broken Britain” — as workers pushed back against below-inflation wage rises.

Recent signals the government will have to push through an austerity program and cut spending has already led to calls from trade unions to protest against any such measures. Sunak will need to balance the need for budget cuts against the risk of sparking more industrial action over the winter, as well as giving the opposition Labour Party another stick to use against the government.

Healthcare:

Overflowing hospitals and long ambulance waits have become the norm in the UK, and the expected winter surge in hospital admissions threatens to overwhelm health services already stricken with underfunding and staff shortages.

The removal of the Health and Social Care levy cuts £13 billion of additional funding for the National Health Service that might have gone toward improving social care to free up hospital beds. That’s money, or savings, that will have to be found elsewhere in the budget.

On top of all that, NHS staff are seeing their wages eroded by rising inflation, and are threatening strike action over pay.

Pensions and Benefits:

With inflation above 10% and still yet to peak, the government is under pressure to raise benefit payments in line with inflation and uphold the so-called triple lock formula on pensions. It dictates that payments rise in line with inflation, earnings growth, or 2.5%, whichever is the highest.

If uprated in line with inflation, welfare spending could reach £277 billion, around half of which being pensions, hitting the budget hard at a time when fiscal headroom is already scarce.

Brexit:

Brexit remains a thorn in the side of the Conservative Party, with the new premier under pressure to deliver on new trade deals and growth.

The Northern Ireland protocol — which removes the need for a hard border with the Republic of Ireland by keeping the region in the European single market for goods — is a particular sticking point, with businesses pushing back against the increased red tape and costs associated with the new arrangement.

Banking Tax:

Uncertainty rankles banks around whether a planned cut in the banking surcharge from 8% to 3% will still take place under Sunak’s leadership. Amid a squeeze on spending, the government can little afford to lose more income to the Treasury coffers.

Banks claim the cut is needed to keep London competitive against other financial centers, with analysis from PwC stating that alongside corporation and other employment taxes, UK banks may pay a higher rate than any financial center that competes with London. Chancellor Jeremy Hunt, who is likely to keep his position, hasn’t quelled speculation about the tax, saying he’ll wait to address the issue during his fiscal statement on Oct. 31.

Party Divisions:

And finally, though importantly, Sunak will be tasked with uniting a Conservative Party that is now bitterly divided by infighting, failed leaderships and deep ideological differences. Any hope of competing against Labour at the next general election in 2024 will depend on rebuilding bridges within the party.

He also risks political impotency if he doesn’t succeed in uniting the Tories behind his political agenda. The specter of former Prime Minister Boris Johnson still lingers on, with some Johnson loyalists still blaming Sunak for his downfall. Sunak said Monday in his short address that “stability and unity” were needed to get through the current difficulties.

Read More: Feuds and Loathing in Westminster Will Haunt Next Tory Leader

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UK economy to shrink in 2023, risks ‘lost decade’: CBI

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LONDON, Dec 5 (Reuters) – Britain’s economy is on course to shrink 0.4% next year as inflation remains high and companies put investment on hold, with gloomy implications for longer-term growth, the Confederation of Business Industry forecast on Monday.

“Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but … headwinds are causing them to pause investing in 2023,” CBI Director-General Tony Danker said.

The CBI’s forecast marks a sharp downgrade from its last forecast in June, when it predicted growth of 1.0% for 2023, and it does not expect gross domestic product (GDP) to return to its pre-COVID level until mid-2024.

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Britain has been hit hard by a surge in natural gas prices following Russia’s invasion of Ukraine, as well as an incomplete labour market recovery after the COVID-19 pandemic and persistently weak investment and productivity.

Unemployment would rise to peak at 5.0% in late 2023 and early 2024, up from 3.6% currently, the CBI said.

British inflation hit a 41-year high of 11.1% in October, sharply squeezing consumer demand, and the CBI predicts it will be slow to fall, averaging 6.7% next year and 2.9% in 2024.

The CBI’s GDP forecast is less gloomy than that of the British government’s Office for Budget Responsibility – which last month forecast a 1.4% decline for 2023.

But the CBI forecast is in line with the Organisation for Economic Co-operation and Development (OECD), which expects Britain to be Europe’s weakest performing economy bar Russia next year.

The CBI forecast business investment at the end of 2024 will be 9% below its pre-pandemic level, and output per worker 2% lower.

To avoid this, the CBI called on the government to make Britain’s post-Brexit work visa system more flexible, end what it sees as an effective ban on constructing onshore wind turbines, and give greater tax incentives for investment.

“We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity,” Danker said.

Reporting by David Milliken; editing by Diane Craft

 

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Kevin Carmichael: Jobs numbers show Bank of Canada hasn’t wrecked the economy after all

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What if the Bank of Canada knows what it’s doing?

Inflation is hovering around seven per cent, and the central bank’s target is two per cent, so the easy answer is, “No, it doesn’t have a clue what it’s doing.”

The news this week that the Bank of Canada lost money for the first time in its 87-year history only adds to the superficial notion that appointing Tiff Macklem to guide monetary policy was a mistake, even if the losses were incurred fighting a crisis that was unlike anything any living policymaker had ever seen.

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“We didn’t get everything right,” Macklem told the House finance committee on Nov. 23. “We got a lot of things right. We have some lessons to learn.”

The inflation miss was a serious mistake that warrants deeper scrutiny in case there are things that can be learned that will keep it from happening again. Macklem told lawmakers that as soon as inflation is back to target, “we are going to have to have a thorough review of how all our tools worked” through the COVID crisis.

When the Bank of Canada gets around to that review, it will turn up positives that are obvious to anyone who bothers to look, but end up obscured by the panic over inflation. The latest evidence that the Bank of Canada hasn’t wrecked the economy arrived Dec. 2, when Statistics Canada reported that hiring was little changed in November, and the jobless rate dropped to 5.1 per cent, a possible sign that higher interest rates might be taking the steam out of the economy without severely hurting momentum.

Job seekers attend a job fair in Calgary last month.
Job seekers attend a job fair in Calgary last month. Photo by Jim Wells/Postmedia

The dollar fell against the U.S. currency after the numbers were released, so some traders saw the news as a negative that would cause the Bank of Canada to balk at additional interest-rate increases. It’s possible. Macklem was clear at the finance committee that he isn’t finished, but Bay Street and Wall Street are split on whether that means more outsized interest-rate increases, or whether the Bank of Canada might be ready to taper its aggression, given its own forecasts show the economy could easily slide into a recession at any point over the next few months.

Statistics Canada said employers added 10,000 positions last month, less than the survey’s margin of error, making it difficult to say more than the labour market stood still. However, the agency’s monthly survey of households turned up 108,000 positions in October, an unusually large number, so hiring flatlined at a high level in November.

The jobless rate remains well inside any conventional definition of full employment, which is how economists describe an economy in which there are quantitatively enough jobs for everyone who wants one. Full-time employment increased by about 51,000 positions in November, and have increased by some 460,000 positions since November 2021, another sign of a strong labour market.

“It’s quite clear that the labour market remains tight and in solid shape overall,” Douglas Porter, chief economist at Bank of Montreal, said in a note to his clients.

Average hourly wages increased 5.6 per cent from November 2021, the sixth consecutive month that pay gains topped five per cent, a sign of upward inflationary pressure that the Bank of Canada has said it will be watching closely. Porter said the “still firm” pace of pay increases could leave Macklem uneasy about inflation heading into next week’s interest-rate decision, and re-upped his prediction that policymakers will opt to raise the benchmark rate another half point, which would put the target at 4.25 per cent.

The Bank of Canada’s benchmark rate was 0.25 per cent in March, and the possibility of an increase of four percentage points in less than a year will startle those who worried that a decade of ultra-low interest rates would make households and executives supersensitive to higher borrowing costs.

That worry could still be valid. Indeed, after getting beaten up earlier in the year for letting inflation get out of control, the Bank of Canada now regularly faces invective for causing a recession that hasn’t yet happened.

Earlier this week, Statistics Canada reported that gross domestic product grew at an annual rate of 2.9 per cent in the third quarter, much faster than most forecasts. The GDP numbers, paired with the ongoing strength of the labour market, supports Macklem’s bet that it is better to attack inflation now, when the economy is strong, rather than proceed tentatively, discover inflation is persistent, and end up having to raise interest rates when the economy is weaker. It might even be time to resume talking about a “soft landing,” which is how Bay Street talks about the possibility that an inflationary economy can be slowed without crashing into a bad recession.

“We’re entering 2023 at least in better shape than we have seen in many other moments in the past where we’re entering a slowdown or a recession,” Guy Cormier, chief executive of Desjardins Group, told the Financial Post’s Barbara Shecter this week, observing that there is “still money” in the personal and business accounts of the financial institution’s clients. “Yes, there will be a slowdown, but we feel that there are some positive conditions that could unfold in the next six, seven months.”

Here’s another positive: Statistics Canada reported that the employment rate of women aged 25 to 54 rose to 81.6 per cent in November, a record that further narrowed the gap with men. One of the goals of the Bank of Canada’s assault on the COVID crisis was to keep traditionally marginalized groups from getting left behind, betting that would create the foundation for a sturdier recovery.

Macklem’s not wrong when he ways the central bank got a lot of things right.

• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin

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IFF 2022 Global Finance and Development Report: Global Economy Expected to Grow 2.8% in 2023 Excluding Impact of Pandemic

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With the same exclusion, China’s economy is on track to expand 4.6%

GUANGZHOU, China, Dec. 4, 2022 /CNW/ — Global economy is to grow 2.8% in 2023 as the Chinese economy is expected to expand 4.6%, next year according to forecasts made by the International Finance Forum (IFF) 2022 Global Finance and Development Report released at the IFF 2022 Annual Meeting on Friday.

The report estimates Chinese economy will grow 3.3% in 2022.

Developed economies will grow 1.2% while developing countries will expand 3.9% next year, the report said.

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Global inflation, the ongoing pandemic, and geopolitical tensions are the main reasons for global slowdown in 2022, said Prof. Song Min, IFF Academic Committee Member and Dean of the Economics and Management School at Wuhan University, leading author of the report.

The Chinese economy will rebound in late 2022 and early 2023 as the country adjusts its Covid control measures according to the report.

The report forecasts the global economy to remain weak in 2023 as monetary tightening in developed countries to rein in inflation will slow growth, which could further slow down economic growth in developing nations.

To boost growth, the IFF recommends a few policy measures including China’s adjusting its pandemic controls, moderate monetary policies by central banks, boosting domestic growth by developing nations and quickening of green transition and strengthening of international cooperation.

This is the second annual report by the IFF on the global economy. The report has two sections: the first part provides an analysis and outlook of the global economy while the second part offers an assessment of the global digital economy and insights into new growth momentum of global financial markets.

About International Finance Forum (IFF)

The International Finance Forum (IFF) is a non-profit, non-official independent international organization founded in October 2003 by leaders from China, the US, the EU and the other G20 countries, in concert with emerging economies and the leaders of multiple international organizations, including the UN, the World Bank and the IMF. Also known as the Finance 20 (F20), the IFF is also a high-level permanent dialogue mechanism and multilateral cooperation organization within the world of finance.

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View original content:https://www.prnewswire.com/news-releases/iff-2022-global-finance-and-development-report-global-economy-expected-to-grow-2-8-in-2023-excluding-impact-of-pandemic-301694111.html

SOURCE International Finance Forum (IFF)

View original content: http://www.newswire.ca/en/releases/archive/December2022/04/c0217.html

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