For the past eight weeks through the Conservative Party’s leadership contest, the severity of Britain’s economic troubles only worsened. The new prime minister, Liz Truss, will be greeted with a long list of demands for rapid and aggressive support to alleviate the pain caused by the rising cost of living.
Looming over the new government is the specter of stagflation — an unpleasant mix of stagnant economic growth and high inflation. Consumer prices are rising at their fastest pace in four decades as the rate of inflation exceeds 10 percent and is expected to keep climbing.
Meanwhile, the economy contracted in the second quarter, and the Bank of England is forecasting a long recession to begin later this year as wages lag and household budgets are squeezed by rising food and energy costs. Household incomes, adjusted for inflation and taxes, are predicted to fall sharply this year and next, in the worst decline in records dating back to the 1960s, the central bank said.
Britain caps household energy bills, but that limit will increase by 80 percent beginning next month. And there are calls for urgent action to help low-income households as it becomes increasingly accepted that a relief package laid out in May is inadequate. Liz Truss said on Sunday that should introduce a package to help people with energy bills within a week of taking office.
Small businesses — especially energy-intensive ones, such as pubs and restaurants — are warning of widespread closures over the winter as companies won’t be able to afford their energy bills. The pub industry said there needs to be “swift and substantial” government intervention to avoid large-scale job losses.
There is also a growing number of labor strikes, as workers across industries demand pay raises in line with the cost of living. Among those walking out or threatening to are port workers, nurses, teachers, train drivers and mail service personnel.
Beyond these immediate problems, Britain also has many long-running economic challenges to overcome. How will the new government try to make a success of Brexit, which so far has made trading with Britain’s closest neighbors more cumbersome and costly? Can the government close the inequality gap between London and the rest of the country? Amid an energy crisis, will the government get on track to meet its legally binding targets to reach net zero carbon emissions?
The gloomy economic prospects for Britain are clear in financial markets. The pound dropped 4.5 percent against the U.S. dollar in August, its worst month in nearly six years, and is now trading at $1.15. It’s at its lowest level since March 2020, and approaching the lowest since 1985. The price of British government bonds has dropped as investors turn away from British assets and expect the central bank to need to raise interest rates sharply to rein in inflation.
