Sep 7, 2022 - Economy & Business

U.K.'s Liz Truss inherits an economic nightmare

Illustration of a broken Union Jack flag

Illustration: Sarah Grillo/Axios

Britain's economy, rendered fragile and brittle by Brexit, has proved incapable of withstanding the twin scourges of the pandemic and energy price inflation. The result is a historic economic implosion.

By the numbers: One British pound is now worth just $1.15, down from $1.50 on the morning of the Brexit referendum in 2016.

  • The Bank of England predicts that inflation will hit 13% this quarter. GDP will also turn negative this quarter, the Bank says — and will then stay negative through every quarter of 2023. After that, in 2024 and onwards, growth is projected to be "very weak by historical standards."
  • Household incomes are expected to fall by 1.5% this year, after accounting for taxes and inflation, and by another 2.25% next year.

Driving the news: The government of incoming prime minister Liz Truss is expected to spend as much as £200 billion ($230 billion) to goose the economy and subsidize energy costs.

  • The catch: Energy costs are high because demand exceeds supply. Government subsidies will only serve to increase the demand for energy, making it even harder for Britain to find the energy savings it needs.

The big picture: Truss was most recently elected to parliament in December 2019, just weeks before Britain formally left the European Union and months before the pandemic precipitated a seemingly endless litany of scandals surrounding the behavior of lawmakers from the ruling Conservative Party.

  • The vote that made her prime minister involved just 141,725 voters, all of whom were party members.

The bottom line: Only 5% of Britons expect Truss to be a great prime minister, while 35% think she will be terrible.

  • The financial markets seem to agree. Two-year U.K. government bonds are yielding 3.14%, compared to just 1.06% for their German equivalents.
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