Anxious business leaders have cautiously welcomed Rishi Sunak as prime minister amid signs the UK economy is heading for recession after a sharp fall in confidence among company bosses during Liz Truss’s brief premiership.
The latest snapshot from the economy showed optimism among business leaders collapsed in October to the lowest level since April 2020, during the early stages of the Covid pandemic, as intense inflationary pressures, escalating political uncertainty and rising borrowing costs weighed on growth.
Industry leaders said the new prime minister had to take urgent steps to help repair battered business confidence. UK government borrowing costs fell on global markets on the news of Sunak’s victory as Conservative leader, while the pound was little changed against the dollar.
Tony Danker, the director general of the CBI lobby group, said the former chancellor had a “track record of seeing the economy through difficult times” during the Covid pandemic. “[He] is now coming in at a time of great uncertainty with tough choices ahead.
“The new prime minister can lose no time in easing the impact of market turmoil on households and firms, and helping to restore fiscal credibility.”
In a brief victory speech, Sunak said he recognised the “profound economic challenge” facing Britain, adding: “We now need stability and unity.”
The pound fell to record lows in the immediate aftermath of the mini-budget, but has gradually recovered as the government rowed back on its plans and was trading at about $1.13 against the dollar on Monday. The yield – or interest rate – on 30-year UK government bonds dropped by 0.3 percentage points to below 3.8%, falling back close to levels seen before Kwasi Kwarteng’s disastrous fiscal statement a month ago.
Sunak will formally take over as prime minister after meeting the king at Buckingham Palace, most likely on Tuesday, at which point Truss will have served 50 days in the job.
Shevaun Haviland, director general of the British Chambers of Commerce, said his appointment came after a “hugely damaging” few months of political and economic uncertainty. “We cannot afford to see any more flip-flopping on policies – the UK’s businesses need a sustainable, long-term economic plan they can believe in.”
Juergen Maier, the former chief executive of Siemens UK, said he thought the former chancellor was the best candidate to “try to bring some much needed calm” but that deep political risks still remained.
“He needs to stand up to the ERG rightwing faction of his party, who have created untold economic damage. All prime ministers since Brexit have stumbled over this.”
The S&P Global/CIPS UK purchasing managers’ index dropped to a 21-month low in October, the latest release on Monday showed, reflecting the growing risks of recession as households and businesses cut back their spending amid the highest rates of inflation for 40 years.
The monthly survey of company bosses was the third in a row in which a majority reported a contraction in activity. This included delays to business investment decisions due to political uncertainty, as well as concerns over higher borrowing costs as the Bank of England raises interest rates.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “On top of the collapse in political stability, financial market stress and slump in confidence, these higher borrowing costs will add to speculation of a worryingly deep UK recession.”
It comes as the chancellor, Jeremy Hunt, pushes ahead with preparations for the government to announce debt-cutting plans on 31 October. Although some experts have suggested the Tory leadership race could delay the announcement, others say sticking to the agreed date would help prevent a sharper rise in interest rates from the Bank of England when it next meets to decide on borrowing costs on 3 November.
Dave Ramsden, one of the Bank’s deputy governors, said on Monday that Threadneedle Street was “engaging” with the Treasury over the potential fiscal event. The plan, effectively a second budget in as many months, is expected to confirm deep cuts to public spending after a series of U-turns over Kwarteng’s unfunded tax cutting pledges.
Sunak had enjoyed popularity in opinion polls during his time as chancellor in the Covid pandemic, when he approved billions of pounds in spending to help businesses and workers through the health emergency.
However, that began to wane as he initially refused to provide cost of living support earlier this year. He also warned tough tax and spending choices were needed before losing to Truss in the Tory leadership race over the summer.
Philip Shaw, an economist at Investec, said: “Trying to win back voters when the economy faces a number of different difficulties and taxes are going up is a different matter entirely.”
