Jim Power: Next British leader facing myriad economic challenges

Boris Johnson's successor could face a possible recession, an inflation crisis, rising rates, a pound under pressure, and an economy damaged by Brexit 

Rishi Sunak, the former chancellor, is one of the early front runners to succeed Boris Johnson as prime minister of Britain.

After leading the Tory party to a huge majority in the 2019 general election, Boris Johnson is about to exit stage left . Naturally, speculation is now mounting about his possible successor as leader. 

Rishi Sunak is currently a front runner with the bookmakers, but Penny Mordaunt, Liz Truss, and Sajid Javid are also among the favourites. Of course, anything can happen over the coming weeks, particularly in a party that is currently so divided and in such a state of turmoil.

The one thing that is certain is that whoever succeeds Mr Johnson will face a tough task, from a political, social and economic perspective. In fact, some might describe the job as a total poison chalice. 

However, in the pursuit of power, the fact that a chalice may be poisoned is not of real relevance to those aspiring to higher political office. Think Fine Gael back in February 2020.

Like every country in the developed world at the moment, the UK economy is in the midst of a serious cost of living crisis. The headline inflation rate is running at over 9%, the highest of the G7 nations. 

The expectation is that the headline rate will top 10% over the coming months. 

The most recent forecast from the Paris-based Organisation for Economic Cooperation and Development (OECD) is for an average inflation rate of 8.8% and 7.4% in 2023. 

This level of inflation will seriously erode real incomes and do serious damage to consumer spending power, but there are other pressures coming on to the shoulders of the personal sector.

In response to escalating inflation, the Bank of England has increased interest rates on five occasions since December, taking the base rate from 0.1% to 1.25% at the moment. 

The expectation is that this rate will be taken to possibly 3% before the controllers of monetary policy pause for breath. 

A 3% increase in interest rates would obviously do further damage to the personal sector and indeed to the business sector and investment.

In the latest forecast, the OECD is also projecting growth of 3.6% in GDP this year, but is projecting zero growth for Britain in 2023. 

This would represent the lowest growth in the G7, a prognostication that is mainly predicated on the impact of inflation and rising interest rates on the personal and business sectors.

In addition to growth and inflation concerns, which are not unique to the UK, sterling is under significant pressure, particularly against the dollar. 

The fiscal situation is now in significant deficit and the economy is also experiencing record quarterly current account deficits, on the back of a poor export performance. 

The Brexit debacle

This leads on nicely to the debacle that is Brexit. Arguably, Brexit probably would not have happened if Mr Johnson had not supported it. 

However, from a UK economic and political perspective, Brexit is not surprisingly turning out to be an unmitigated disaster.

It does appear that Mr Johnson has struggled with issues around the truth on many matters, but an evaluation of the many promises made in relation to Brexit could be worthwhile. 

The long-term growth potential and productivity of the UK has suffered as a result of breaking links with its biggest trading partner, and the possibility of doing great trade deals with other countries is not exactly working out as promised. 

The Resolution Foundation recently warned that going forward the real pay of British workers will be £470 (€555) lower per year on average as a result of Brexit. 

It has undoubtedly damaged UK labour markets, as demonstrated by the lack of seasonal workers, competitiveness, and productivity. 

It is not clear how this Brexit mess can be resolved, but given the attitude of the inept Labour Party leadership and the Brexit stranglehold that Mr Johnson established over the Tory party, it is hard to imagine any unwinding of the process.

Much depends of course on who is the new prime minister,  but I wouldn’t be holding my breath.

The reality is that the incoming prime minister will be taking over an economy facing possible recession; in the midst of a cost-of-living crisis; rising interest rates; a currency under pressure; and an economy and society deeply damaged by Brexit. 

Last week the Office for Budget Responsibility warned that tax cuts would have to be paid for and that the public finances are already on an unsustainable path. 

Aspiring successors to Boris Johnson should perhaps be careful about what they wish for.