"Whoever Becomes the Next UK Prime Minister Must Face the Worst Economic Situation"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Seoyul] With UK Prime Minister Liz Truss resigning after just 44 days, the successor is expected to face the worst economic conditions the UK has encountered, including high inflation, fiscal deficits, and the depreciation of the pound sterling.

Bloomberg reported on the 21st (local time) that due to recession and soaring inflation limiting the UK government's room for maneuver, whoever becomes the next prime minister will inherit the difficult task of devising a plan to rescue the UK economy.

The UK's Consumer Price Index (CPI) for September surged 10.1% compared to the same month last year, marking the highest increase in 40 years. The energy crisis, compounded by the halt of Russian natural gas supplies, is expected to push prices even higher this winter.

Prices of goods and services are rising faster than wages, putting households under severe cost-of-living pressure. Facing soaring inflation, the Bank of England (BOE), the UK's central bank, has no choice but to continue raising interest rates. Meanwhile, last month, Prime Minister Truss announced a large-scale tax cut policy, ignoring the steep inflation.

The exchange rate of the British pound against the US dollar hit an all-time low, and concerns over worsening fiscal conditions and rising inflation caused government bond yields to surge.

As financial market turmoil intensified, the tax cut policy was eventually withdrawn, but the UK government still has to grapple with a deficit budget. Rising interest rates increase borrowing costs for companies and others, which could lead to a recession.

Amid this vicious cycle, the value of the British pound, which has fallen 17% this year, is expected to decline further. Patrick Bennett, a strategist at Canada's CIBC Bank, predicted that it will take time for investor confidence in UK government bonds and the pound to recover, and that the pound could fall to $1.09 by the end of this year.

The US Wall Street Journal (WSJ) analyzed that despite interest rate hikes, inflation remains unchecked, limiting the government's policy options. WSJ described "Prime Minister Truss's resignation as a case marking the end of the past decade when governments worldwide could borrow money without considering how to repay it, thanks to low inflation and ultra-low interest rates."

This content was produced with the assistance of AI translation services.