UK: A crisis, at least, looks to have been averted – ABN Amro

Bill Diviney, Economist at ABN Amro points out that despite the political chaos of late, the news flow has been largely positive from a policy point of view. He affirms the outlook for the economy is still bleak but considers a crisis at least looks to have been averted. 

Key Quotes: 

“In the near-term we expect the MPC to hike rates aggressively, with a 75bp hike expected on 3 November, and Bank Rate to peak at 4% in early 2023. However, the risks to this view – previously to the upside – have become markedly more balanced.”

“The silver lining to the political chaos is that the worst of the crisis in financial markets – and therefore the risks to the economy – now looks to be behind us. The new government is likely to be as focused on fiscal discipline as the present Chancellor Jeremy Hunt, if not more so.”

“The new government will have tough choices to make over tax and spend plans given the higher risk premium on UK government bonds – which has put a large hole in UK government finances.”

“We estimate that, after accounting for the policy U-turns of the past few weeks, the government needs to find another GBP20bn in tax rises or spending cuts. We think this will take the form of a temporary link of working age benefits to wage growth rather than inflation – meaning a real-terms cut to benefits – alongside a curtailment in public investment.”