After six long weeks of campaigning, the Conservative leadership battle culminated in Liz Truss being appointed as the UK’s newest Prime Minister on 6th September. While there was no shortage of candidates vying to become the new Prime Minister, Truss is now tasked with the unenviable undertaking of reviving the UK’s ailing economy. Facing soaring inflation and a looming economic recession, we weigh the potential impact that the policies of Number 10’s newest resident could have on the UK economy.
Plans to tackle the UK’s ongoing cost-of-living crisis remained the focal point throughout the campaigning process, as the UK consumer faces the deepest living standards squeeze for 60 years. Liz Truss’s campaign centred around a significant fiscal policy support package thought to contain tax cuts, handouts to those on lower incomes and a freeze in utility costs.
In her first week as PM, Truss announced a package worth £130 billion for households to supersede the Ofgem price cap raise in October, capping prices at £2,500 per household for the next two years, £1,000 below the expected increase in October and halving the forecasted £5,000 rise expected next year as natural gas prices continue to soar. For businesses, a further £40 billion has been pledged to cap prices. As a result, economists have been quick to revise down their expectations for peak UK inflation.
As a key driving force behind soaring headline inflation in the UK, the latest cap on energy prices has reduced peak inflation expectations to 10-11%, down from the 14% previously forecast. A lower headline inflation figure is expected to support growth and reduce some of the pressures on consumers and businesses in the near term. While the measures are unlikely to be enough to see the UK avoid a recession, they are expected to limit the depth of the recession, allowing the UK economy to recover at a faster pace than previously anticipated. Truss is yet to announce more detailed plans to stimulate the economy through this challenging period, and the devil will be in the detail, however it is clear that measures must be carefully targeted to avoid stoking inflation.
With UK debt levels recently crossing 100% of GDP following stimulus throughout the pandemic, concerns are being raised as to how the new PM’s plans will be funded. Truss has ruled out a further windfall tax on energy company profits, stating that this would go against her government’s plans to spur investment in growth. Instead, the plans look to be funded by further borrowing, which although is acceptable during a crisis, suggests that some fiscal discipline will be required in the longer term, tempering our growth expectations for 2023 and onwards.
Another key issue which must be considered if the UK is to revive its growth hopes in the future is the UK’s productivity issue, with ONS data observing UK productivity figures among the lowest of the G7 owing to years of low investment. Liz Truss has campaigned to spur economic growth by a variety of tax cuts to promote investment in technology and business. As the near-term focus remains on the immediate cost-of-living crisis, there has been little development on Truss’s proposed tax cuts at this stage, however as it is currently understood, the Prime Minister may look to reverse the National Insurance hike that took effect this year, as well as next year’s planned Corporation Tax hike in a bid to stimulate investment. It has also been reported that the PM may be looking into research and development tax incentives to encourage growth in the years ahead.
From an investment perspective, headwinds clearly remain for the UK economy in the near term, with quick action required to address the cost-of-living squeeze and targeted measures to revive economic growth while keeping a close eye on inflationary pressures. So far, we are encouraged by the early actions of the Truss government, contributing to a cautiously optimistic approach on the medium to long term outlook for UK equities. Overall, despite rising interest rates remaining a headwind for markets in the short term, it’s our view that following a re-rating of risks, UK assets are becoming more attractive, with opportunities arising as the medium to long term outlook improves.
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