UK PM Liz Truss is facing multiple economic crises. Time for

LONDON — New British Prime Minister Liz Truss faces a confluence of economic challenges, but will need to balance her own ideals with the immediate needs of the country.

Last week, Truss announced an emergency fiscal package involving the capping of annual household energy bills at £2,500 (£2,891) for the next two years, with an equivalent guarantee for businesses over the next six months and further support in the pipeline for vulnerable sectors. 

The plan is expected to cost the public purse more than £130 billion, with new Finance Minister Kwasi Kwarteng expected to outline how it will be funded later this month, but is broadly seen by economists as a positive step to limit inflation and reduce the immediate risk of recession.

Former Finance Minister Rishi Sunak’s energy rebate package for households will remain in force, while the Bank of England will establish a liquidity facility to aid firms in the wholesale energy market to weather extreme price volatility.

Energy plan

The fiscal package remains “pivotal” to the U.K.’s growth outlook, according to Modupe Adegbembo, G-7 economist at AXA Investment Managers, who suggested in a research note Monday that the support to real incomes and growth boost will “likely be enough to prevent the economy slipping into a prolonged recession.”

U.K. GDP grew by 0.2% month-on-month in July, official figures revealed on Monday, below consensus expectations for a 0.4% expansion. GDP contracted by 0.1% in the second quarter of 2022, and Adegbembo suggested that the additional public holiday this month for the funeral of Queen Elizabeth II may tip the U.K. into a technical recession this quarter.

The announcement has led major banks to rapidly reappraise their inflation projections. Barclays now expects inflation to close out 2022 at slightly below 9%, well below the Bank of England‘s 13.3% projected peak, and the British lender cut its forecast for 2023 CPI inflation from 9% to 5.5%.

U.K. inflation unexpectedly cooled in August, new data showed on Wednesday, so the Bank of England Monetary Policy Committee may be revisiting its outlook. However, economists were cautious of calling the peak, with some speculating that last month’s reading may have been a “fluke” on a broader upward trajectory. 

Food and non-alcoholic beverage inflation rose to 13.1%, further compounding the day-to-day struggles facing household finances.

“Although the first-order impact of ‘Trussonomics’ will be to lower inflation over the next twelve months, the sheer scale of stimulus is likely to add to inflation in the medium term, pointing to a higher terminal rate than the (Bank of England’s) MPC had previously embedded,” said BNP Paribas Chief European Economist Paul Hollingsworth.

“Indeed, we note that the MPC is even further behind the market-implied terminal rate than when it began its tightening…