Liz Truss becomes the shortest-serving prime minister in British history but her chaotic economic legacy will live on.
After a tumultuous 44 days in office—which saw unprecedented interventions by the Bank of England in the gilts market, and sterling falling to a 35-year low against the dollar—Liz Truss has resigned as UK Prime Minister.
But she won’t be forgotten quickly. During her short-lived tenure as PM, Truss and her Chancellor Kwasi Kwarteng’s £45 billion of unfunded tax cuts announced in September’s mini-budget sent UK bond markets into a downward spiral, triggering the Bank of England to act and avert a financial crisis as yields on long-dated UK government bonds plummeted.
“Although Truss was brought into usher in an era of growth and ‘trickle-down economics’, her strong pro-growth policy was poorly timed, as her policies fanned the flames of surging inflation,” said Giles Coughlan, Chief Market Analyst at HYCM commenting on Truss’ resignation.
Coughlan says Truss’ departure is likely to be mildly GBP positive, depending on her successor for the premiership. “Already, the UK gilt market was supported,” he said, “as rumors of the prime minister’s resignation came to light this morning, which is a good sign for the pound’s stability.”
But Truss’ resignation ushers in yet another round of turmoil in UK politics in as many months. In the last four months alone, the UK has had four chancellors, three home secretaries and two prime ministers.
Having shown her chancellor, Kwarteng, the door, following the market’s disastrous reaction to their mini-budget, his successor, Jeremy Hunt, tried to restore financial markets’ confidence in the trajectory of UK fiscal policy earlier in the week by unwinding most of the tax cuts they announced back in September. But now much of Hunt’s efforts could be undone by the ongoing political instability.
Nigel Green, CEO of deVere Group, an independent financial advisory, asset management and fintech firm, said Truss’ resignation will fuel financial-market fears as political chaos in the UK heightens.
“Markets are unforgiving. We have seen this in recent weeks when the pound hit historic lows against the dollar, gilt yields jumped, and stock markets dipped due to reckless economic policies set out by the Truss government,” he said. “Investors know that the political chaos that has defined the UK throughout 2022 is nowhere near over, and this fuels uncertainty and drives turbulence in financial markets.”
Noting that inflation has hit more than 10% and the country has no functioning government, “to investors, the UK looks ungovernable,” Green added, “and its economy resembles that of an emerging market, not a G7 nation.”
The pound was up almost 1% against the dollar and almost half a percent against the euro, following news of the resignation. But the relief will be shortlived as political uncertainty remains.
“The pound, gilt markets, amongst others, will remain under pressure for the foreseeable future,” said Green.
The scrapping of most of Truss’ economic agenda in a bid to calm markets is seen by many as a loss of credibility, which cannot be regained all that rapidly. “U-turns and abandoning landmark economic policy after economic policy does not inspire investor confidence and trust,” noted Green, who added that UK financial assets remain hugely unattractive for investors right now and markets will reflect this.
While many will be glad to see the back of “Trussenomics,” William Marsters, Senior UK Sales Trader at Saxo, said the announcement of a Tory leadership contest next week leads to more uncertainty on who could be next in No. 10.
"Sterling's game of Snakes-and-Ladders is far from over, yet it's unlikely GBP will show many signs of long-term recovery,” said Marsters, who predicts citizens are likely to continue to suffer from rising inflation.
But it’s not just inflation the UK is battling. There are other risks, unique to the UK, including its proximity to the Ukraine crisis, geopolitical instability, and Brexit, says HYCM’s Coughlin . “If I was a multinational thinking about where I would like to develop my office and I had a strategic interest in Europe,” he wonders, “would I be thinking of the UK—where you don’t know what corporation tax is going to be from one moment to the next?” Businesses stability and predictability for at least a medium-term outlook but “we don’t know what’s going on with the UK,” Coughlin says. “The UK doesn’t know what’s going on with itself.”