Asset Intelligence Comment: Liz Truss resigns – the investor’s view
By Kel Nwanuforo
Well, there we have it folks: yet another Prime Minister bites the dust.
Liz Truss is headed for the exit door, after less than two months in office. By quite some distance, she will be the country’s shortest-serving Prime Minister, and the first since World War II never to lead her party in a general election.
Today’s developments represent a personal tragedy for Ms Truss and many will understandably feel sympathy for her on a human level. However, looking back at our own comments from the time Boris Johnson announced that he was going – a full three months ago – it is difficult to say that the trials Ms Truss and her government have faced were not foreseeable:
A clear theme has emerged among many of the contenders to replace Mr Johnson: promise tax cuts. Lots of them! And quickly! Yet, so far, less thought appears to have been given to the practicality or wisdom of this platform than to its popularity.
The simple fact – the obvious fact, even – is that putting more money in people’s pockets and in businesses’ bank accounts will add to total demand in the economy. Boosting demand, while supply chains remain strained by Ukraine and the aftershocks of the pandemic, will increase inflation. This is Economics 101…
… The capacity for a tax giveaway to fuel inflation further, necessitating even more interest rate hikes than are already expected, is clear.
The misjudgement of Ms Truss and her (first) Chancellor Kwasi Kwarteng on this crucial matter is why the country is now facing its third Prime Minister in less than two months.
In the short period since Ms Truss announced her resignation, there has been no sign of panic in the markets – indeed, quite the opposite. At the time of writing, Sterling has in fact strengthened slightly against the US dollar, while the FTSE is up on the day. Meanwhile government borrowing costs, the real barometer of crisis the past few weeks, are down. It is likely that, at this point, markets view the uncertainty of a new leader as being preferable to the instability which Ms Truss had come to represent.
Although at the time of writing the precise mechanics of this latest leadership election remain unknown, the new Prime Minister will be in place by Friday 28 October.
Whoever emerges as the victor, it is practically a certainty that they will continue with the tight restraint on spending and taxation espoused by Jeremy Hunt, the Chancellor of the Exchequer, over the past few days. We would view this as positive for investors in UK assets, given the demonstrated drawbacks of the alternative approach.
Looking slightly further out, given the unprecedented situation of a single parliamentary term taking in three Prime Ministers, opposition parties are understandably calling for a general election to be held immediately. There is no constitutional requirement for such to take place until January 2025 – though the political pressure for one may prove difficult to resist.
Unless perhaps the new Prime Minister is one… Boris Johnson. A flight of fancy? Maybe. But it seems fair to say that stranger things have happened. And quite recently too…