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resignation British Prime Minister Boris Johnson Adding to the uncertainty looming over Britain’s economy, which is already under pressure from near double-digit inflation, recession risks and Brexit.
Johnson, who announced Thursday that he would resign, could take weeks to run. That will put the world’s fifth-largest economy at risk of further volatility at a time when the pound is near a two-year low against the dollar and the Bank of England is in a dilemma to raise interest rates without hurting economic activity.
read: Boris Johnson resigns as UK prime minister to stay as new leader
Conservative leadership races vary in duration. Theresa May won in less than three weeks after David Cameron pulled out in 2016 as other contenders pulled out.
But it took Johnson two months to become the new leader after May announced her intention to step down in 2019.
At least six candidates are expected this time.
read: ‘Partygate’, Pincher and more: The scandal over Boris Johnson’s prime ministership
Below is a summary of the key issues hanging over the UK economy as the political drama unfolds.
inflation
Britain is feeling more pressure than many other countries with inflation hitting a 40-year high of 9.1%. The Bank of England sees a breakthrough of 11% later this year.
The IMF said in April that Britain faces longer-lasting inflation and slower growth than any other major economy in 2023.
Sterling’s recent fall has added to inflationary pressures, although the prospect of increased public spending or tax cuts to shore up the Conservative party’s fortunes pushed the pound slightly higher on Thursday.
But whoever succeeds Johnson can only do so much to offset soaring global energy and food prices.
Fiscal policy
Whoever succeeds Johnson will have to make major decisions on taxes and spending, which could reduce the risk of a recession but could also increase inflationary heat in the economy.
When he resigned as finance minister on Tuesday, Rishi Sunak said he was at odds with Johnson, who has long pushed for more tax cuts. Sunak’s short-term priority ahead of his resignation was to ease Britain’s debt load, which jumped to more than £2 trillion amid the coronavirus pandemic.
Analysts at Citibank said they expected Conservative leadership contender Priti Patel and Liz Truss, who served as Johnson’s home and foreign ministers, could call for quick tax cuts and spending increases, while Sunak and Mr. Former health minister Sajid Javid may be more fiscally cautious.
The long-term impact of their decisions will be large.
Britain’s budget watchdog said on Thursday that debt could more than triple to nearly 320 percent of GDP in 50 years if the government doesn’t tighten fiscal policy in the future.
Brexit
More than six years after Britain voted to leave the European Union, London and Brussels remain at loggerheads as Johnson insists on rewriting trade rules involving Northern Ireland – which he agreed to in 2019.
While any changes in overall trade relations are likely to be modest, the prospect of improved ties with the EU under a new prime minister has prompted some economists to see stronger UK exports and investment.
In addition, some of the front-runners to replace Johnson, mainly Foreign Minister Truss, openly support his combative stance on the EU.
Bank of England
The Bank of England has raised interest rates five times since December, the most in 25 years, and has signaled it will continue to raise rates, possibly by half a percentage point at its next meeting in August.
But the risk of a recent global economic slowdown has reduced investor bets on such a major BoE move. Uncertainty over the direction of UK fiscal policy could be another reason for caution.
More political chaos?
While Johnson’s exit closes a new chapter in one of the most turbulent times in modern British political history, it remains to be seen whether his successor can calm things down.
Berenberg analyst Kallum Pickering said the UK economy would benefit if Johnson was replaced by “a more diligent and serious man”.
But Citi analysts said they doubted the different factions within the Conservative Party would unite around a clear strategy.
“Over the next few months, we will see the UK face a once-in-a-lifetime squeeze on living standards, a lack of a clear strategy and serious government divisions. The risk of serious policy mistakes is therefore high,” they said.
“Early elections should also not be ignored, although we still expect a general election in 2024 only.”
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