How Will the New Prime Minister Influence Growth in the United Kingdom?

Liz Truss, of the Conservative Party (colloquially the Tory party), has just become the newly minted prime Minister for the UK this past Tuesday 6^th September, after the resignation of her predecessor, Boris Johnson. She met with the Queen at Balmoral during the day and flew back to Downing Street for her first address to the nation shortly after.

The 47-year-old Truss is now the country’s 56^th prime minister, and just the third female to hold the position, after Margaret Thatcher and Theresa May. She will have one of the more difficult sets of challenges to face in her term compared to those that came before her, prior to the general elections being held in January 2025.

With the dire cost of living situation and rising inflation looking overwhelming, energy prices skyrocketing, the conflict in Ukraine to manage, the economy on the verge of recession, and other industrial issues, she will need to deliver strong leadership and be very effective to turn things around for the economy.

Truss has been in the parliamentary cabinet for 8 years and has served under 3 prime ministers: Cameron, May, and Johnson. Prior to her own recent appointment, she was promoted to foreign minister, where she led the transition after Brexit to a new set of diplomatic ties and trading platforms.

She succeeded against the former finance minister, Rishi Sunak, in a very tight race, where the majority of the Conservative party’s lawmakers were originally against her, and some MPs feel she ran an aggressive campaign that has alienated many in her already divided party.

This could make it difficult for her to find support for her plans in parliament, regardless of her vision for the country, if she doesn’t work to mend fences.

In his farewell speech from Downing st, prior to formally tendering his resignation to the Queen on Tuesday, former Prime Minister Johnson called for party unity, saying, “It’s time for politics to be over, folks. It’s time for us all to get behind Liz Truss.”

What Policies Can We Expect?

Outside her new home and office at Downing st, London, she addressed the crowd shortly after a heavy downpour of rain.

“I am confident that together we can ride out the storm. We can rebuild our economy, and we can become the modern, brilliant Britain that I know we can be. I know that we have what it takes to tackle those challenges. Of course, it won’t be easy, but we can do it,” she said.

Truss campaigned on a few major priorities prior to her appointment. No new taxes was one of the most prominent, and she is actually in favor of tax cuts as well, namely the scrapping of increases to corporation tax on major companies and the reduction to the payroll tax, which would together cost around 30 billion dollars in revenue losses. She plans to provide a solution to rising energy costs and wants to fix the struggling National Health Service (NHS).

Her agenda during campaigning also included plans to review the Bank of England’s mandate, to possibly reign in the independent decision-making process on interest rates, which has made many investors uncertain.

In a statement, Truss also pledged that her government would take immediate action on the spiraling cost of energy as soon as her first week in office. Reuters reported on Wednesday of her potential plan to freeze the country’s energy bills for a so far unknown period of time.

These are some big calls to make after the previous government’s spending spree over the past few years of the pandemic, and it has many financial analysts warning of a huge increase to the deficit, especially if it costs taxpayers as much as expected, which is anywhere between 100-200 billion pounds, depending on how long the crisis persists.

Ms. Truss also has no intention of funding her plans with the use of new windfall taxes for energy companies, as she feels it will not be of benefit to investments in the country, instead, her new finance minister, Kwasi Kwarteng, met with senior bankers in London on Wednesday. They set out plans to borrow more in the short term to support households and drowning businesses, while in the medium to long term, she believes reforms on the supply-side will boost the country’s growth trajectory.

How The Markets Responded

The idea of revitalizing growth with the strategy of cutting taxes, whilst also pledging to spend hundreds of billions of pounds to help the country pay for their energy bills, and then the thought of potentially tampering with the independence of the BOE, has understandably got financial markets in a bit of a buzz of uncertainty.

A few days ago, markets focused on the extra borrowing that Ms. Truss may need to reduce home energy prices, causing a major sell-off of British government bonds on Tuesday, bringing 10-year gilt rates to their highest level since 2011, around 3.125%.

The same scenario can be applied to other maturities. The 5-year gilt rates reached their highest level since 2009 at around 3.061%, while the 30-year gilt rates reached their highest level since July 2014 at about 3.411%.

The pound has fallen against the dollar a few days ago to lows not seen since the mid 80’s, when Margaret Thatcher was in power, and is slightly rebounding from its bottom at 1.15077 at the time of writing. ActivTrade’s sentiment indicator on the AcitvTrader platform shows that traders are mostly buying the currency pair (70%).

Daily GBP/USD Chart – Source: ActivTraders

This fall is predominantly a result of the strength of the dollar, but worries about the United Kingdom’s growth prospects and soaring inflation have also weighed on the local currency.

Economists from the popular American investment firm Goldman Sachs warned that a recession was a real possibility in the country, and that inflation in the United Kingdom might top 20% as early as the beginning of next year if spiraling gas costs do not come down.

What should traders expect from the GBP from now on? Will it keep falling, or will it bounce back?