Blain’s Morning Porridge Oct 27th 2022 – The UK Economy – Austerity or time for a Reset?
“We’re on the Road to Nowhere…”
This Morning: The New UK Sunak Government had steadied markets, but in coming weeks it will become increasingly clear the fractured Tories are trapped in no-Growth Austerity. Can they escape, or is it time for a Political Reset?
Which comes first? The Party or the Nation?
The latest 2022 Tory PM model, v.3.1 the “Rishi Sunak” upgrade, was launched into Downing Street earlier this week. Markets have shown their appreciation and steadied. On a relative basis, Sunak is a vast improvement on Truss. But, already the new government is trapped by the consequences of its predecessor – begging the question: for the good of the nation, do we need the Political and Economic reset only a general election can provide?
Sunak might get lucky. The fall in gas prices, full European fuel bunkers, and the prospects for a mild winter suggest the energy inflation component of inflation will fall. Inflation may moderate as supply shocks calm – although long-term cost-of-goods, commodities and wage-inflation pressures are still set to increase. The market wants to hear budget plans, but the delay of the October 31st fright-night statement with a full autumn statement on Nov 17 only saw Gilt yields rise 10 basis points, before they fell right back to 3.55%. UK stocks rallied.
The market is generally happy the new UK Government is not going to do Stupid – the way the Truss/Kwarteng did. The question is: can they do clever?
Delaying the budget statement means Sunak and his barely-used, one-careful-lady-owner, Chancellor Jeremy Hunt’s statement will now follow the Bank of England’s Interest Rate hike next week. If nothing else, the timing means it opens a realm of opportunities to yet again blame the Bank as mortgages rise.
The reality doesn’t change: Sunak faces an enormous in-box of challenges to face in terms of energy, inflation, growth, welfare, education, health, defence, budgets, spending plans, fiscal and monetary policy. He has warned us: “Tough economic choices lie ahead”.
They certainly do. They will be tougher if we are following bad policies. The problem is simple: the Tories, as a direct result of Truss blowing their reputation for financial prudence, are now locked into an equally suicidal fiscal orthodoxy – Austerity. Truss was right about one thing, and one thing only; the need for growth. Austerity is definitionally anti-growth.
Sunak and Hunt are locked into spending cuts to look like they are balancing the budget. Theirs is an administration with zero options. There is said to be a list of 104 different spending cut proposals to slash $35 bln of spending. Looks nice on paper, but the real effects will be care-centres closed, cancer-wards shuttered, transport services stopped and kids going hungry across the land so the Government can undo the reputational damage they inflicted. The scale of cuts is a massive overreaction to the outright lunacy of Trussonomics – but Sunak and Hunt are trapped in it.
Sadly, the dire financial state of the nation post Truss is not even Sunak’s first concern. Top of his priority list is resolving the on-going internal divisions within his disunited party. He has been forced to compromise in his appointment of cabinet ministers to give the appearance of unity… but we all know how that works. He has the job of herding a sack of angry cats.
Yesterday, he faced off Sir Kier Starmer, leader of the Labour Party, at Prime Minister’s Question time. He did tolerably well for a first timer, but his inexperience showed. There are two ways for a Prime Minister to win PMQs:
- By wielding rapier-like wit and wisdom to confound and out-manoeuvre, scoring points by making the audience laugh at the leader of the opposition, or
- Not letting the opposition leader win – they score points if the audience laughs at the premier.
Sunak and Starmer are not natural comedians, which maybe means PMQs will become more cerebral and meaningful. Who knows. We might get lucky.
Sunak was playing with an open goal behind him – the reappointment of Cruella Braverman as Home Secretary. Starmer booted that ball into the back of that particular net: painting her appointment as a “grubby” little deal done to secure her vote, neatly avoiding Penny Mordaunt getting the 100 nominations she needed. Anyone with 2 minutes experience of UK politics knows that’s exactly what happened.
(I would not be surprised to hear Braverman’s already planning the next ERG backed coup and briefing against Sunak and anyone else she considers a threat – basically everyone. (Someone should probably confiscate her phone or at least disable WhatsApp.))
Braverman may be least of Sunak’s problems. There are a large number of disaffected Tory MPs from the Johnson “Cakeist” wing of the Party who blame him for Boris’ downfall, and on the Right, where the former minister for the 17th Century, Jacobi Rictus-Mogg fears Sunak will undermine Brexit by accepting a semaphore message from President Macron.
Sunak may well be the adult in the room. But, to be blunt, that room has an awful lot of “special” children in it.
But….. the Morning Porridge is not about Politics, or the delights of bashing Tories. In terms of markets – is this time to be thinking about buying UK Inc. assets on the cheap?
What’s the outlook for the Sunak Premiership? I called round a number of close market, institutional and political contacts y’day. The consensus is the outlook for the economy remains bleak – recession and contraction into the middle of 2024 at the earliest. On the upside, the improvement in Gas Prices and Government energy subsidies should mean the Bank of England can maybe ease up on inflation fighting. Some investors now think interest rates will rise slower than the market expects – peaking as early as March 2023, giving the Sunak government some extra-time to re-establish its electoral credibility.
UK gilts were never going to default, but the risk premium relative to other sovereigns will remain elevated until the new Government beds in, which may not happen – that rather depends on political and real world no-see-em events.
Politically, the consensus is Sunak is going to struggle unless the Tories see a sustained turn-around at the polls. Underperformance at the Dispatch box, on TV or in the polls will encourage the Right to challenge him, potentially triggering either concessions or a confidence vote threat, triggering a General Election. That could happen within months – it might not happen at all. One of my contacts suggests there are still many “trials and tribulations” to come in term of the Boris Johnson inquiry, Sunak’s family wealth, and “other” issues bubbling under the radar screen, locked in Rupert Murdoch’s safe.
An election could prove really messy. Labour’s phenomenal 30 point lead will not be sustained – no matter how effective Sunak proves to be. In a full general election Labour may win a small majority, or it may be forced into coalition with the Liberals or even the SNP. The SNP will demand Scottish Independence vote – disaster for UK as Scottish voters hate the Tories. The Liberals will demand proportional representation – changing UK politics for ever.
While a new Labour government has a more credible growth plan – anything is better than Austerity frankly – it will then struggle to make the reforms needed to social care, NHS and benefits, Policing, Defence and taxation. As they struggle to deliver, its internal discipline could well break down – leading to left wing vs centre split in the party. Labour need a strong, ruthless leader to sustain party discipline. Kier Starmer is a decent, good man – but will he have the strength to hold the UK’s future together?
It all feels a bit heads they win, tails you lose..
Porridge Extra: Rishi Sunak – a brief history (Not just for Non-UK readers.)
Here is an interesting factoid for you: Following Sunak’s win on Monday, the first Truss cabinet office to resign was her chief-whip Wendy Morton. She is a North Yorkshire lass, with a long history of contesting hopeless seats on behalf of the party before finally getting into parliament in 2015. She is acknowledged to be a tough, no-nonsense, hard worker. In 2014, despite being the local girl, she lost the selection battle for the North Yorkshire seat of Richmond when William Hague unexpectedly resigned. The candidate who was selected was Rishi Sunak – whose previous connections with the Conservative party and Yorkshire are… vague.
Sunak has impressed me since the political newbie in a junior Treasury role was parachuted into No 11 (The Chancellorship) when Sajid Javid resigned on a matter of principle; refusing to being told by Boris and Dominic Cummings what to think, say and do, back in Feb 2020.
Sunak has all the right Thatcherite credentials as local boy made good. (Although he presents himself as a son of local enterprise, his family are very well established in Hampshire’s Indian community.) His parents were a doctor and pharmacist in my adopted home city of Southampton. He attended Winchester College, Oxfordn (PPE), worked at Goldman Sachs, did a Fullbright Scholar MBA at Stanford, and the worked for a couple of Hedge Funds. Genuine success. Apparently he did a spell as an intern at Conservative HQ in the 90s, although no one has yet found any photos of his time there.
The transformational moment of Sunak’s rise was his marriage in 2009 to Akshata Murthy, the daughter of Indian billionaire, founder of tech giant Infosys, Narayana Murthy, who is close to Premier Modi. (Among Narayana Murthy’s more interesting views on the endemic corruption prevalent in India is making the paying of bribes legal – but making it illegal to receive them.) Sunak was a director of Murthy’s Catamaran Ventures from 2013-15.
After joining the Murthy clan, Sunak’s career shifted into politics. According to his political flacks he started working for the Tories in 2010 – although the record shows he was in the US at the time – becoming head of the Black and Minority Ethic (BME) unit in 2014, when he was chosen as candidate for the safest seat in the land, Richmond in Yorkshire
In No 11 Sunak made the best of the Covid crisis. He came over as technical, detail driven, and competent. “Dishi Rishi” impressed the public – and he successfully levered himself into becoming more than just Boris’ tame Chancellor. He is credited with the Furlough scheme, Covid bounce-back Loans and Eat Out to Help Out – although in reality these were put together by smart folk in his Treasury team – whom he has rewarded.
Sunak is genuinely respected for his essential Britishness, while remaining true to his Indian roots. The image of him lighting a Diwali Light went down exceptionally well. In Southampton there is real pride in his achievements – and the fact he’s a Saints Fan! (Southampton FC) The enthusiastic reaction to his win in India raises high hopes of an early trade deal.
Let’s see what happens next..
Strategist – Shard Capital