Britain’s prime minister has vowed to rebuild the economy and “weather the storm” that is brewing over the country, but Liz Truss faces a daunting task.
Truss inherits a battered economy on the brink of a potentially prolonged recession, with record inflation forecast to worsen in coming months and millions of people asking the government for help to deal with high energy costs.
Here’s a look at the magnitude of the economic challenges Truss faces and how she’s expected to respond:
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energy costs
At the top of Truss’s agenda is a cost-of-living crisis caused by soaring natural gas and electricity prices. Starting in October, energy bills for millions of households will soar to an average of 3,500 pounds ($4,000), almost triple what they paid a year ago. Bills are expected to keep rising and could top £4,000 in January.
The sharp increase began last year, as economies around the world recovered from the coronavirus pandemic and global demand for natural gas and oil surged. Russia’s invasion of Ukraine sparked more volatility in wholesale gas prices, as Moscow cut or reduced its supplies to European countries such as Germany.
Britain imports only a small percentage of its gas from Russia, but the UK relies on gas more than its European neighbors because it has less nuclear and renewable energy. Compared to other European countries, the UK relies much more heavily on gas to heat homes and generate electricity. The country also does not have much capacity to store gas, forcing it to buy short-term on the spot market.
Charities and public health officials warn that the crisis will hit the poorest especially hard as winter approaches. Hospitals say skyrocketing electricity costs will hurt patient care, while many small businesses warn they face closure if they don’t get government help.
triggered inflation
It’s not just about gas and electricity, other costs, like food, have also gone up. Inflation has been rising since last year and is now above 10% for the first time since the oil spikes of the 1970s and 1980s.
And the worst is yet to come: The Bank of England has predicted that the war in Ukraine could push inflation in Britain to 13.3% next month. Some, like US bank Citi, think inflation could hit 18% next year before starting to recede.
It is a jolt for millions of people. Before the crisis, Britain had average inflation rates of 2% for years.
Meanwhile, average wages, especially for public sector workers, have not kept pace with inflation. Tens of thousands of railway, port and postal employees, lawyers and garbage collection employees have gone on strike this summer demanding better pay. Numerous other sectors ponder similar steps.
“Real wages are falling, certainly faster than they have in at least 45 years, possibly as much as 100 years,” said Greg Thwaites, an economist and director of research at the Resolution Foundation, a think tank for economics and technology. social.
Warnings of a long recession
The Bank of England has forecast that soaring energy prices will push the country into recession later this year, with economic growth forecast to decline in each quarter of 2023.
The International Monetary Fund says the British economy is expected to have the weakest growth among the Group of Seven in 2023.
“This acute crisis in living standards that we are going through comes to the end of 15 years of very weak growth in the UK economy,” Thwaites said.
Brexit, Britain’s exit from the European Union, was not beneficial in that sense, he said.
What is truss doing to help
Truss is to announce a major financial package on Thursday to combat soaring energy costs.
Her government has not provided details, but press reports indicate that she will approve an immediate freeze on energy bills for households and additional aid for businesses.
The BBC reports that energy quotas could be capped with the introduction of a government “super fund”, from which energy companies can borrow, and that the cost of that help could reach 100 billion pounds ($116 billion). .
Bank of England Governor Andrew Bailey said on Wednesday that such measures would almost certainly quell inflation in the short term. But it was unclear how the Truss government plans to pay for that huge bill while delivering on campaign promises to cut taxes and boost growth.
“There is the reasonable question of whether that should be paid for by future electricity bills or by future taxpayers or current taxpayers,” Thwaites said. “But, in the end, someone has to pay.”
Hannah White, acting director of the Institute for Government, said the measures go against the prime minister’s inclinations.
“What (Truss) is being forced to do, which is completely against her instincts, is a large government program to help the people in this situation,” says White. “She really has no choice but that goes directly against how she would ideally rule.”
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