Prime Minister Truss - Risks & Crises

06 September 2022 • 4 mins read
Prime Minister Truss - Risks &

Liz Truss became Britain's new Prime Minister today. The former UK Foreign Secretary inherits economic troubles that include soaring food prices and energy bills. AFP

  • New UK Prime Minister Liz Truss faces multiple crises. Inflation is at four-decade highs at 10%. Recession is likely as energy costs soar. Public services are fragile and EU trade risks threaten.
  • The new PM is set to announce a large fiscal response to the energy crisis, likely including relief for low-income households, tax cuts on utility bills and, possibly, energy price freezes.
  • Government borrowing to fund the measures may worsen inflation. We see the Bank of England hiking rates from 1.75% to 3.00% now.
  • But with the UK set for recession before year end, the BoE may pause its rate hikes before the Federal Reserve does. We thus stay bearish GBP and fearful of the UK’s multiple crises.

New UK Prime Minister Liz Truss enters office facing several major crises.

Unemployment & Inflation UK

Source: Bank of Singapore, Bloomberg.

UK inflation is at four-decade highs of 10.1% as the first chart shows. Pandemic disruptions, trade frictions from the UK’s exit from the European Union and soaring energy prices from Russia’s invasion of Ukraine are set to raise inflation well into double digits. The energy shock is also likely to push the UK into recession before the end of 2022 and activity may contract throughout 2023. We forecast UK GDP will fall by 0.8% next year. At the same time, public services are fragile after the pandemic and years of under-funding. Last, disputes with the EU following Brexit are affecting UK trade. Given the multiple crises, we think the start of the new Truss government will have the following implications for financial markets.

UK Markets

Source: Bank of Singapore, Bloomberg.

Firstly, a large fiscal response to the energy crisis will be announced this month. Relief for low-income households, national insurance contribution (NIC) cuts and lower taxes on utility bills are likely. Caps on energy prices may also be considered.

Secondly, the large extra government borrowing needed to fund the measures, potentially GBP50 billion initially, may worsen inflation. We expect the Bank of England (BoE) to respond with 50bps rate hikes at its September and November meetings before slowing UK growth causes the BoE to step down to a 25bps hike in December. Its Bank Rate may thus rise from 1.75% to 3.00% by year end.

Thirdly, despite larger BoE rate hikes, the outlook for the GBP remains bearish. The chart shows the GBP has hit two-year lows below 1.15 against the USD, close to our three-month forecast of 1.14. And the GBP has been as low as 1.05 in 1985.     

The risks for GBP and UK assets still seem skewed to the downside. A deeper recession may occur in 2023 if inflation surges far over 10%. Recession may also make the BoE stop hiking before the Federal Reserve, leaving its Bank Rate below the fed funds rate. Last, the UK current account deficit at a huge 8% of GDP, puts the GBP at risk if capital inflows dry up. This month, PM Truss may decide the UK should over-ride its EU exit treaty regarding trade with Northern Ireland. This could spark strong retaliation from the EU. An EU-UK trade war would hurt sentiment sharply and risk the GBP revisiting its 1985 lows against the USD.

Important information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.

Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.

This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.

The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.

This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.

This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.

Mansoor Mohi-uddin
Chief Economist
Was this page useful?