Investing 17-11-2022 15:09 16 Views

UK “is now in recession” – What happens now? Autumn Statement reaction

The UK is in a very tough place. This afternoon, chancellor Jeremy Hunt showed the extent of the trouble the nation is in when he announced an aggressive round of tax hikes and spending cuts.

Hunt said in the statement that a £30 billion cut to spending does not signal a return to austerity. That’s a nice sentiment, but much like unfortunate cryptocurrency investors are finding out this week, billions upon billions can’t vanish without a little pain. This is well and truly on track to a return to austerity.

Britain “is now in recession”, the chancellor said. And when combining the £30 billion of cuts with all the tax hikes, too, times are only going to get tougher.

Not that this is not needed. Like I said in my piece analysing the disastrous budget of Hunt’s predecessor, Kwasi Kharteng, these moves are necessary to get the UK economy back on track and rein in the suffocating inflation engulfing the nation.

Look no further than yesterday’s inflation reading to see how bad things are getting. Not that anyone on the ground needs formal figures to hammer it home, but inflation was confirmed yesterday to have soared to a 41-year high of 11.1%.

Hunt made it very clear what the priority was.

“High inflation is the enemy of stability…it erodes savings…it hurts the poorest the most”

He’s correct. Inflation is the most pernicious vice that can affect an economy. Those at the bottom of the food chain see the price of everyday goods rocket, without assets to protect themselves. Real estate rises, rents, financial assets (as we saw during the pandemic), but what happens to your bank account if you don’t have any assets to begin with?

As painful as this Autumn Statement is – nobody likes higher tax and less spending – it’s absolutely necessary. I wrote a scathing deep dive of Lizz Truss’ short-lived, but oh-so-damaging, stay in 10 Downing Street explaining the simple logic of why unfunded tax cuts in a high-inflation environment are not a good idea.

At least Hunt understands this economics 101. Which is, well, important for a chancellor.  

The market’s reaction was subdued, which is not a bad thing. There were no real surprises in the Statement, with the bulk of the macro consequences known already.

Gilts are relatively unchanged (although they had moved upwards in the days leading up to the statement). The pound, which has been rallying since Hunt made it clear that Truss’ budget would be removed, is currently trading at $1.182, down 0.8% – suggesting perhaps investors expected even more aggression from Hunt – although it had risen in the days leading up to the announcement.

Hunt’s statement does signify that the UK has moved into damage control, committed to tackling the serious problems the economy currently faces. It represents a new paradigm from the reign of Truss.

Unfunded tax cuts are as risky as unfunded spending, which is why we reversed (the previous budget)

Jeremy Hunt, UK chancellor

The pound is now trading higher than when Truss took office, trading at a 3-month high.

With the weather getting ominously colder amidst the energy crisis, the coming months will be extremely challenging for the people of the UK. Tax bills are now higher, energy costs are elevated, inflation is still roaring and spending has been cut.

These are suffocating problems, but these decisions from Hunt this afternoon, as much as they hurt, are unavoidable in order to tackle these issues. It will be a difficult winter ahead, no doubt. But there is no other solution to rein in inflation, weather this storm and get the economy back on track – even if that may take longer than most anticipate.  

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