UK’s next leader could be knee-deep in recession

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The Bank of England surprised analysts last week – not so much with its half-point hike in the key rate to 1.75% as with its surprisingly bleak assessment of Britain’s medium-term outlook. Its main projection shows a shallow but prolonged recession, with little or no output growth over the next three years and inflation peaking at over 13% before the end of 2022. Unemployment is expected to rise from just under from 4% of the working population to more than 6% by 2025.

Officials rightly point out the uncertainty attached to all these projections. This should be kept in mind before drawing conclusions on the new forecasts. Yet when all is said and done, one thing stands out: with Britain politically paralyzed and still awaiting the appointment of its next prime minister, the crisis could hardly have come at a worse time.

The immediate cause of the UK economic situation is, as elsewhere, the global energy price shock. Natural gas has seen the biggest increase, and Britain is exceptionally dependent on this particular fuel. In addition, fiscal policy has been tightened over the past year as the government has limited emergency spending amid the pandemic. Disruptions due to Brexit are a third factor. Coupled with an exceptionally tight labor market, this combination of supply shock, fiscal adjustment and severe trade dislocation explains the mix of high inflation and slowing growth described by the bank.

It is now clear that the Bank of England (like the Federal Reserve) has been too slow to start raising rates. But central banks cannot meet such challenges alone. Questioning their independence – as the main Conservative leadership candidate, Liz Truss, did – makes matters worse.

The UK government needs an intelligible tax and spending strategy. At the moment, Britain has no government, let alone a strategy.

Support for low-income households will be needed to avoid serious hardship when a new round of higher energy costs begins later this year. The aid that was belatedly granted in May should be renewed, with more help for the most needy groups and, therefore, less in the form of universal payments. For now, there is enough fiscal space for this (bearing in mind that temporarily high inflation boosts tax revenues). But the longer-term trend in public debt is grim, and public services are in dire need of more resources. Fix these issues before thinking about tax cuts.

And do you remember Brexit? The near total neglect of trade policy between the UK and the EU in leadership debates has been staggering. A new crisis is entirely possible given the lack of progress in resolving the dispute over the Northern Ireland protocol. This must be resolved as soon as possible. Beyond this immediate dispute, the warming of economic relations with the EU should be among the main priorities of the next Prime Minister. Even under far more favorable circumstances, Britain could not succeed in a state of sullen animosity towards its closest trading partner. It has enough challenges to overcome without adding further Brexit nonsense to the mix.

In recent weeks, the Conservative Party contenders for the leadership of the country have mostly debated their rival conservatisms. The gravity of the country’s problems demands practical answers to urgent questions. Whoever wins next month will have to start delivering them.

More from Bloomberg Opinion:

• The Bank of England gives a lesson in honest central banking: Mohamed A. El-Erian

• The beast of inflation won’t sit still for long: Alison Schrager

• Wishful thinking won’t help the Fed defeat inflation: Bill Dudley

The editors are members of the Bloomberg Opinion Editorial Board.

More stories like this are available at bloomberg.com/opinion

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