- Rishi Sunak is to be the next UK prime minister but some city economists said that his economic approach will lead to a deeper recession.
- Rsm group commented on the situation by adding that the country will be facing a fresh wave of fiscal distress.
- Financial markets are watching the new PM very closely and seeing how he does work.
According to a top City economist, Rishi Sunak’s economic strategy will cause a deeper recession than previously anticipated while keeping interest rates under control.
Fresh wave
According to Thomas Pugh at RSM, the country might be in for a new round of austerity given the new prime minister’s commitment to fiscal responsibility.
This could result in a recession deeper than the 2 percent previously predicted, he said, when coupled with the cost-of-living crisis and rising rates.
Inflation
The Bank of England won’t need to raise interest rates as quickly because lower fiscal spending is likely to keep inflation in check over the medium term.
A period of austerity would cause RSM to lower its forecast for peak interest rates even further, from 4.75 percent to 4.5 percent.
Fiscal discipline
“For now, financial markets will be watching the new PM very closely, wanting to see evidence that he intends to stick to the message of fiscal discipline that he set out in the previous leadership campaign. Any signs of straying off the path of fiscal discipline are likely to spook financial markets, resulting in another drop in the pound and a surge in gilt yields,” said Mr. Pugh.
Political instability
“Overall, the news that Rishi Sunak will be the next PM means that the big downside risks to the economy posed by a prolonged period of political instability and significant fiscal tightening have receded,” Ruth Gregory, senior UK economist at Capital Economics, added. “However, with fiscal tightening still on the way, the risk is that the recession will be deeper or last longer than currently anticipated.”
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Source: The Telegraph
