Concerned business leaders have cautiously welcomed Rishi Sunak as prime minister amid signs the UK economy is headed for recession after corporate bosses’ confidence plummeted during Liz Truss’ short tenure.
The latest economic snapshot showed optimism among business leaders in October plummeting to the lowest level since April 2020, in the early stages of the Covid pandemic, as intense inflationary pressures, escalating political uncertainty and rising borrowing costs weighed on growth.
Industry leaders said the new prime minister must take urgent steps to restore tarnished business confidence. The UK government’s borrowing costs fell in world markets on news of Sunak’s victory as Conservative leader, while the pound was little changed against the dollar.
Tony Danker, the director-general of the CBI lobby group, said the former chancellor had “a track record of guiding the economy through tough times” during the Covid pandemic. “[He] now comes a time of great uncertainty with difficult choices.
“The new prime minister has no time to lose in mitigating the impact of the market turmoil on households and businesses and helping restore fiscal credibility.”
In a brief victory speech, Sunak said he recognized the “profound economic challenge” facing Britain, adding: “We need stability and unity now.”
The pound fell to record lows immediately after the mini-budget but gradually recovered as the government scaled back plans, trading around $1.13 against the dollar on Monday. The yield – or interest rate – on 30-year UK government bonds fell 0.3 percentage point to below 3.8%, almost back to where it was before Kwasi Kwarteng’s disastrous financial report a month ago.
Sunak will officially take over as Prime Minister after most likely meeting the King at Buckingham Palace on Tuesday. By that time, Truss will have been in office for 50 days.
Shevaun Haviland, director-general of the UK Chambers of Commerce, said his appointment came after a few “hugely damaging” months of political and economic uncertainty. “We cannot afford to see more policy shifts – UK businesses need a sustainable, long-term economic plan they can believe in.”
Jurgen Maier, the former chief executive of Siemens UK, said he thought the former chancellor was the best candidate to “try to bring some much-needed calm” but there were still deep political risks.
“He must stand up to his party’s right-wing ERG faction, which has caused untold economic damage. All prime ministers since Brexit have tripped over it.”
The S&P Global/CIPS UK purchasing managers’ index fell to a 21-month low in October, Monday’s latest release showed, reflecting mounting recession risks as households and businesses cut spending amid the highest inflation rates in 40 years.
The monthly survey of CEOs was the third in a row with a majority reporting a drop in activity. These included delays in corporate investment decisions due to political uncertainty and concerns about higher borrowing costs as the Bank of England hikes interest rates.
Chris Williamson, chief economist at S&P Global Market Intelligence, said: “Added to the collapse of political stability, financial market tensions and the collapse in confidence, these higher borrowing costs will fuel speculation of a worryingly deep UK recession.”
It comes as Chancellor Jeremy Hunt ramps up preparations for the government to announce debt haircut plans on October 31. Although some pundits have suggested the race for Tory leadership could delay the announcement, others say sticking to the agreed date would help prevent the Bank of England from raising interest rates more sharply when it meets on November 3 next time to decide on the cost of borrowing.
Dave Ramsden, one of the bank’s deputy governors, said Monday that Threadneedle Street was “in touch” with the Treasury Department about the potential fiscal event. The plan, effectively a second budget in as many months, is expected to confirm deep public spending cuts after a series of about-faces over Kwarteng’s unfunded tax cut pledges.
Sunak had been popular in opinion polls during his time as chancellor during the Covid pandemic, when he approved billions of dollars in spending to help businesses and workers through the health emergency.
That began to wane, however, when earlier this year he initially refused to pay for living expenses. He also warned tough tax and spending decisions would be needed before losing to Truss in the Tory leadership race in the summer.
Philip Shaw, economist at Investec, said: “Trying to win back voters when the economy is facing a variety of difficulties and taxes are rising is a very different matter.”