On Wednesday morning, with London’s financial markets reopening after the resignations of senior ministers put Prime Minister Boris Johnson’s tenure in doubt, Britain’s stock market index rose more than 2 per cent, along with increases in other European markets.
The British pound rose slightly against the US dollar on Wednesday morning, a slight rebound from a 1.5 per cent decline the previous day, as investors sought the safety of the US currency amid rising recession risks around the world.
For financial markets, global trends of high inflation, deteriorating energy security and weak growth prospects outweighed the sudden turmoil in British politics. In the short term, there is no obvious way for traders to profit from the news, Jordan Rochester, chief strategist at Nomura Bank, wrote in a Tuesday evening report. More information is needed on whether Mr Johnson will remain in office and the plans of the replacement ministers. Mr. Rochester wrote that the recent decline in the pound was due to economic factors.
On Tuesday, Rishi Sunak cited economics in his explanation of his resignation as Chancellor of the Exchequer, Britain’s top finance official. He was due to deliver a speech next week with Mr Johnson about their plan to support the economy during a period of high inflation and slow economic growth, and the differences in their proposals appeared to be too big to break.
“It has become clear to me that our approaches are fundamentally very different,” Mr. Sunak wrote in his resignation letter to the Prime Minister.
Just a few hours later, Mr. Johnson announced the replacement of Mr. Sink as chancellor: Nazim al-Zahawi, who had been the education minister. Mr. Zahawi was initially brought to the cabinet only last year, having previously overseen the rollout of coronavirus vaccines.
“I have to rebuild the economy and switch to growth in the economy, that’s my focus,” Al-Zahawi said Wednesday morning.
He faces a major challenge because Britain’s economic outlook has worsened. Inflation is at its highest level in four decades, and is not expected to peak until it rises above 10 percent in the fall, when the cap on household gas and electric bills is reset higher. Families are facing the worst income pressure in generations, and the pain is already acute as people try to spend less, while credit card and other personal debts are on the rise.
The Bank of England raised interest rates to their highest level since 2009 and said more increases were likely to come in the fight against rising inflation, even as the outlook for economic growth deteriorated. Companies are facing rapidly rising costs, with many struggling to hire workers since Brexit and the pandemic have reduced the pool of available workers.
Mr Sunak announced billions of pounds of additional spending in May to help people with the rising cost of living, funded in part by an unexpected tax on oil and gas companies. But he expressed reservations about the extent to which the government could use the spending to reduce economic hardship and Prefer corporate investment and lower taxes to increase productivity.
Differences in policy approach and succession of economic shocks have hampered the government’s efforts to pursue a coherent economic strategy. Late last year, Johnson declared he could build a high-growth, high-wage economy, and now he’s warning of big wage increases that could exacerbate inflation.
With wages below inflation, workers called for strikes that prepared Britain for a summer of labor unrest. Recently, training workers and criminal defense lawyers have left their jobs, and among those threatening to go on strike in the coming months are health care workers, school teachers and postal employees.