Britain’s next leader could be knee-deep in a recession


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

Officials rightly emphasize the uncertainty associated with any such projections. That should be kept in mind before drawing conclusions about the new forecast. But 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 Britain’s economic situation is, as elsewhere, the global energy price shock. Natural gas has seen the strongest increase, and the UK is unusually dependent on this particular fuel. In addition, fiscal policy has been tightened over the past year as the government reined in emergency spending from the pandemic. Disruption due to Brexit is a third factor. Together with an unusually tight labor market, this combination of supply shocks, fiscal adjustment and severe trade dislocation account for the mix of high inflation and slowing growth that the bank describes.

It is clear now that the Bank of England (like the Federal Reserve) was too slow to start raising interest rates. But central banks cannot tackle such challenges alone. Questioning their independence – as the leading candidate for the Conservative Party leadership, Liz Truss, has done – makes matters worse.

The UK government needs an understandable strategy for taxes and spending. At the moment, the UK lacks a government, let alone a strategy.

Support for low-income households will be needed to prevent severe hardship when a new round of higher energy costs starts later this year. Aid that was given too late in May should be renewed, with more aid for the most needy groups and correspondingly less in the form of universal payments. For the time being, there is enough fiscal space for this (bearing in mind that temporarily high inflation increases tax revenues). But the long-term trend in public debt is bleak, and public services are in dire need of more resources. Solve these problems before thinking about tax cuts.

And do you remember Brexit? The almost total neglect of UK-EU trade policy in the leadership debates has been striking. A new crisis is entirely possible given the lack of progress in resolving the row over the Northern Ireland Protocol. This must be arranged as soon as possible. Beyond this immediate dispute, warmer economic relations with the EU should be among the next prime minister’s top priorities. Even under far more favorable circumstances, Britain could not succeed in a state of grim hostility to its nearest trading partner. It has challenges enough to overcome without adding any fresh Brexit nonsense to the mix.

In recent weeks, the Conservative Party’s candidates to lead the country have mostly debated their rival brands of conservatism. The seriousness of the country’s problems requires practical answers to pressing questions. Whoever wins next month has to start delivering them.

More from Bloomberg Opinion:

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

• The beast of inflation will not remain quiet for long: Alison Schrager

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

The editors are members of the Bloomberg Opinion editorial board.

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