Why is Rishi Sunak casting such a sombre mood? It’s more about politics than economics
Rishi Sunak says we are facing a “profound economic crisis”. Big words, not to mention depressing. But do they really stack up?
Is the UK really facing something unique? Can he really blame much of it (as was implicit in his speech) on his predecessor? Or is something else going on?
Let’s start at the start.
There is no doubt that the UK is facing tough economic times right now. We are quite plausibly in the teeth of a recession. Look at measures like the purchasing manager’s index from S&P Global – a measure of how businesses are faring right now – and it is contraction territory. This is a recession warning, and no mistake.
And there are certainly some factors which will make this a grim year or two for households. For one thing, mortgage costs are rising, and rising fast. The average two-year fixed rate mortgage is currently up above 6%, a level which implies the highest repayments as a percentage of household incomes since the late 1980s or early 1990s. This is clearly not good news.
And it’s a similar story for energy bills. Even after you account for the energy price guarantee introduced by Liz Truss, the amount the average household spends on energy this winter will still be the highest we’ve seen since at least the 1950s. Again, not good news – and note that since the scheme has been shortened from two years to six months, it’s quite plausible the costs are even greater next year.
Put it all together and any measure of our collective standard of living suggests an astonishing fall this year. We are all going to be much poorer, relative to what we typically want to spend our money on. And that, in large part, is down to the impact of higher energy prices, which creep into every part of our lives.
But these are not the only issues facing the government.
The UK is not the only major economy facing a potential recession
One problem which no previous prime minister has been able to address successfully is Britain’s productivity malaise. Output per hour is perhaps the single most important yardstick of our economic wellbeing and it has essentially flatlined since the financial crisis, making (and this is not an exaggeration) everything worse: our incomes, our quality of life, the level of taxes and national debt.
And this is before you consider the deeper issues facing the global economy right now. Most glaringly we seem to be in the early stages of a new Cold War, which could result in the creation of trading blocs rather than a fully globalised world. And this prognosis is, frankly, more optimistic than many. This will have enormous economic implications.
But here’s the thing. None of these challenges are necessarily Britain’s alone. The UK is not the only major economy facing a potential recession: others in Europe will probably have even deeper contractions this winter. Disappointing productivity is something many developed economies struggle with. Interest rates are rising everywhere (even if the UK’s recent increase in borrowing costs outpaced other nations).
Many of the current problems pre-date Liz Truss
Nor is it especially fair to blame all these problems on Liz Truss: they pretty much all pre-date her. And here’s the really interesting thing: the spike in government bond yields which followed her and Kwasi Kwarteng’s mini-budget has now been almost completely erased.
Those gilt yields are now nearly back to where they were before. So too are expectations for Bank of England interest rates next year. This is an extraordinary turnaround – a consequence of the fact that the Truss government is no more.
But it means that actually much of the damage has now been erased. It’s worth pondering this for a moment. Remember: that rise in gilt yields as international investors looked askance at the UK pushed up the potential cost of borrowing both for households and for governments. It meant that if the government carried on having to issue debt at those kinds of interest rates then its debt interest bill would have been a lot higher. The IFS calculated the ongoing cost at about £10 billion a year. That’s a big deal.
‘Credibility premium’ on government debt is shrinking
But now that the “credibility premium” on government debt is shrinking, that problem is no longer, well, a problem. It may soon have disappeared altogether.
Which raises a question: why did Rishi Sunak try to cast such a sombre mood on the steps of Downing Street? My suspicion is that it’s about 60% politics and about 40% economics.
The politics first: if he can convince the public (and his MPs) that things are grim, it means less resistance for the inevitable cuts. Much as Covid united the party, perhaps, he thinks, the threat of economic contagion could do something similar.
If he can persuade the public that the bad news he’s meting out is down to Liz Truss rather than his own policies as chancellor (most of these problems were problems when he was in Downing Street and had responsibility for doing something about them) then, well, that would obviously suit him. Even if it’s not entirely accurate.
Sunak’s warnings are only 40% economics
The 40% economics is intriguing, because there’s a virtuous circle here. If he can deploy phrases like “profound economic crisis” and “difficult decisions” he can persuade markets that he’s really serious about cutting debt, which in turn should push down gilt yields even lower. Which means the hole in the public finances suddenly gets smaller too.
Talking tough could actually mean he doesn’t have to act quite so tough in the coming austerity mini-budget or whatever we’ll call it.
Not that much of this will be detectable when the fiscal statement lands. We are clearly in for some tough cuts for the economy. But most of the challenges they are intended to address were baked in long before Liz Truss ever reached Downing Street.
Business
HSBC ‘being attacked all the time’ by online criminals – as boss ‘kept awake at night’ by cyber threat
The boss of one of the UK’s biggest banks says it is being attacked “all the time” by online criminals and he is kept up at night by cyber threats.
“It does keep me awake,” HSBC UK chief executive Ian Stuart told the Treasury Committee of MPs.
“Because we can be attacked and we are being attacked all the time.”
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Mr Stuart said banks were spending “enormous” sums of hundreds of millions of pounds on IT systems – the biggest expense in their businesses.
“Cybersecurity is now very much at the top of our agenda,” he added.
Ian Stuart, chief executive of HSBC UK, appearing before the Treasury Committee. Pic: PA
Concerns were also highlighted by Lloyds Bank chief executive Charlie Nunn, who said financial fraud will get worse if banks cannot intervene to prevent it and social media and telecoms companies are not incentivised to halt it.
Mr Nunn said the UK “has become the home of fraud”, adding that the number of victims is “pretty disturbing” and “individual cases are harrowing”.
Major high street businesses, including M&S and the Co-op, have been hit by cyber attacks in recent weeks and had their operations impacted.
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Who is behind M&S cyberattack?
Cybersecurity threats, however, were not behind the several-day outage at Barclays at the end of January, its UK chief executive Vim Maru said.
He added: “We’ve learned the lessons. We’re acting on the lessons, both work done internally, but also with help from third parties as well.
Account holders across the UK have suffered a spate of IT glitches from different banks around paydays this year.
Tens of millions of pounds on IT have been spent and customer glitches have fallen, Mr Maru said.
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Could ageing tech be behind banking outages?
He added that the problem at Barclays was a software issue, saying: “We put a fix in place that means that we won’t have a recurrence.”
The steel tycoon Sanjeev Gupta is mounting a last-ditch bid to salvage his British operations after seeing an emergency plea for government support rejected.
Sky News has learnt that Mr Gupta’s Liberty Speciality Steels UK (SSUK) arm is seeking to adjourn a winding-up petition scheduled to be heard in court on Wednesday.
The petition is reported to have been brought by Harsco Metals Group, a supplier of materials and labour to SSUK, and is said to be supported by other trade creditors.
Unless the adjournment is granted, Mr Gupta faces the prospect of seeing SSUK forced into compulsory liquidation.
That would raise questions over the future of roughly 1,450 more steel industry jobs, weeks after the government stepped in to rescue the larger British Steel amid a row with its Chinese owner over the future of its Scunthorpe steelworks.
If Mr Gupta’s operations do enter compulsory liquidation, the Official Receiver would appoint a special manager to run the operations while a buyer is sought.
A Whitehall insider said talks had taken place in recent days involving Mr Gupta’s executives and the Insolvency Service.
Steel industry sources said the government could conceivably be interested in reuniting the Rotherham plant of SSUK with British Steel’s Scunthorpe site because of the industrial synergies between them, although it was unclear whether any such discussions had been held.
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Mr Gupta is said to have explored whether he could persuade the government to step in and support SSUK using the legislation enacted last month to take control of British Steel’s operations.
Whitehall insiders said, however, that Mr Gupta’s overtures had been rebuffed.
He had previously sought government aid during the pandemic but that plea was also rejected by ministers.
The SSUK division operates across sites including at Rotherham in south Yorkshire and Bolton in Lancashire.
It makes highly engineered steel products for use in sectors such as aerospace, automotive and oil and gas.
A restructuring plan due to be launched last week was abandoned at the eleventh hour after failing to secure support from creditors of Greensill, the collapsed supply chain finance provider to which Mr Gupta was closely tied.
Under that plan, creditors, including HM Revenue and Customs, would have been forced to write off a significant chunk of the money they are owed.
The company said last week that it had invested nearly £200m in the last five years into the UK steel industry, but had faced “significant challenges due to soaring energy costs and an over-reliance on cheap imports, negatively impacting the performance of all UK steel companies”.
It adds: The court’s ability to sanction the plan depended on finalisation of an agreement with creditors.
“This has not proved possible in an acceptable timeframe, and so Liberty has decided to withdraw the plan ahead of the sanction hearing on May 15 and will now quickly consider alternative options.”
One source close to Liberty Steel acknowledged that it was running out of time to salvage the business.
They said, however, that an adjournment of Wednesday’s hearing to consider the winding-up petition could yet buy the company sufficient breathing space to stitch together an alternative rescue deal.
A Liberty Steel spokesperson said on Tuesday: “Discussions continue with creditors.
“Liberty understands the concern this will create for Speciality Steel UK colleagues and remains committed to doing all it can to maintain the Speciality Steel UK business.”
The Insolvency Service and the Department for Business and Trade have also been contacted for comment.
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