It has been another tumultuous 24 hours in UK politics, with the embattled Prime Minister Liz Truss facing senior resignations, continued in-party fighting and another harrowing performance at Prime Minister’s Questions.
This is on top of the new Chancellor reversing virtually all aspects of Truss’s economic ‘growth’ plan, which has sent the markets into freefall and completely undermined her credibility as leader.
The undermining of the UK markets will have a global impact too, with emerging economies like South Africa likely to suffer as a result. We’ll explore this further in the article below!
The Challenges Facing the UK Economy
While the rate of inflation in the UK depreciated nominally to 9.9% in August, it had peaked at 10.1% in July and is forecast by the Bank of England (BoE) to reach 11% this winter.
What’s more, it’s unlikely to drop back below the 10% mark until Q2 2023, while it may not reach the BoE’s target of 2% until the end of 2024.
While inflation has gradually eroded the purchasing power of the pound through 2022, the currency hollowed out completely following the announcement of Truss’s widespread tax cuts and broader economic growth plan.
In fact, the (GBP_ sunk to an all-time low against the US Dollar at one point), and while the decision of new Chancellor Jeremy Hunt to reverse much of Truss’s policy has helped to drive subsequent gains in the GBP/USD, the pound remains vulnerable and trapped in an increasingly narrow range.
Even more alarmingly, Truss’ initial policy was entirely at odds with the strategy deployed by the BoE, whose vision of the UK economy is considerably bleaker than that of the PM.
After all, BoE chairman Andrew Bailey recently raised the base rate by half a percentage point after five previous hikes since December 2021, in order to combat inflation (which enjoys an inverse relationship with interest rates) and and help cope with a depressing forecast of five consecutive quarters of negative growth and the onset of a technical recession.
GDP will shrink by up to 2% during this time, while the prospect of widespread and non-targeted tax cuts (which has now fortunately been averted) would have sent inflation soaring even higher in the coming months.
How Will This Impact on South African and Similarly Developing Economies?
With a growing vacuum in political and economic leadership in the UK (even the International Monetary Fund felt compelled to step in and comment on the policies initially implemented by the PM), things are likely to get worse before they improve on these shores.
With the UK also known as a bellwether of the global economy, it’s also likely that the decline of the region’s economic performance will impact directly on developing nations across the globe.
This includes South Africa, which is also engulfed by record government borrowing, rampant inflation and huge increases in the base rate of interest.
Ultimately, the nation’s Reserve Bank is trying to increase borrowing costs ahead of developed market economies in the UK and US, while creating a challenging economic climate in which businesses struggle with reduced turnover and the rising cost of borrowing.
This means that the recent growth forecasts for SA (which include a prediction of 2% growth this year and 1.7% in 2023) are grossly optimistic, especially as they’re primarily built on the notion of rising global demand for commodities within the developed world.
More specifically, if the BoE is correct and the UK (along with other major European nations) enter a technical and inflationary recession, South Africa is likely to enter a period of similar stagnation and stagflation for the foreseeable future at least.
The Bottom Line
Make no mistake; a global downturn or recession in the developed world will drag a mid-sized economy like SA down with it, creating a significant issue for affected households and businesses.
Of course, South Africa has done much to balance its economy and drive financial inclusion through the adoption of cryptocurrencies, but this alone isn’t enough to cope with an increasingly bleak macroeconomic climate.
So, the country is facing a bleak and uncertain period in the months ahead, safe in the knowledge that it must battle its own economic challenges and cost-of-living crisis while facing the fallout from similar issues throughout the developed world.
