Friday 14 October 2022

Kwarteng U-turn soon

Kwarteng is cutting short his trip to the IMF’s annual meeting of finance ministers and central bank governors in Washington. The UK government likes to suggest Britain is suffering from the same global problems as many other nations, but our finance minister is the only one who has to scuttle back early to sort out a mess of his own making, that’s the difference. A humiliating U-turn is expected shortly. By early next week, most of the tax cuts announced on 23 September will either be dropped or pushed so far into the future, they might as well be.

This comes after MPs began plotting moves to replace Truss and Kwarteng with Mordaunt and Sunak and presumably Truss got wind of it. This is from The Times last night:

"Senior Conservatives are holding talks about replacing Liz Truss with a joint ticket of Rishi Sunak and Penny Mordaunt as part of a 'coronation' by MPs.

"Truss and Kwasi Kwarteng, the chancellor, is expected within days to make a humiliating climbdown over corporation tax in an effort to calm the markets and see off a mounting revolt."

I think you can see the depths of the mire we’re in when two idiots are at risk of being replaced by two more. Sunak might be slightly less of an idiot but let us not forget he has been a Brexiteer since his schooldays! Anyone who thinks that leaving the EU is a benefit to trade and growth is clearly not that smart.

All the effort in Downing Street will now be turning to how to dress up a devastating U-turn to make it seem that you are sticking to your guns and calmly driving policy steadfastly onward. It is not going to be easy.

The truth is that the pair of them have lost the confidence of the markets and the party and will have to go. The Bank of England will stop buying gilts today although I’m not sure at what time. This morning the pound is well above $1.13 but the Japanese bank Nomura is advising its clients that the exchange rate will reach parity by the end of November and be down to $0.975 by the first quarter of next year.

This is what is being reported:

"But Nomura says the Pound's fate is sealed. 

"The main reason why GBP should continue to fall is declining global growth expectations, risk sentiment on the back foot, and the UK's significant current account deficit over winter with the risks of energy blackouts," says Nomura.

"We expect GBP to reach parity by end-November, 0.975 by year-end, and raise our conviction to 5/5," says Rochester [a strategist at Nomura]."

Nomura doesn’t think anything the government might do - reversing the unfunded tax cuts and jacking up interest rates - will change that.

One of the indicators banks look at is the trade (or current account deficit) and at 8.5 percent this is worryingly high. Under those circumstances, Sterling will automatically fall to bring things back into balance. Imports become more expensive and exports become cheaper.

However, we are so reliant on EU companies for food and other essentials that I am not sure making things more expensive will have the normal effect. And exports have not been boosted since 2016 by the fall of sterling since then. You have to ask yourself why the normal rules of international trade are not working and I think you are bound to look at Brexit as a proximate cause.

The TCA has made exporting to our largest overseas market much more difficult and at the same time, imports from it are almost as easy as they were before because we are still not applying import checks at Dover and elsewhere. We have a burgeoning trade deficit and are deliberately hindering our exporters. The financial markets are not daft if our politicians are.

Both Kwarteng and Sunak are keen Brexiteers while Liz Truss now has the zealotry of a recent convert and so, they are unlikely to change the general direction of travel for long. It is difficult to see why Nomura’s forecast will not turn out to be right, if not by Q1 next year then not long afterward. And Brexit will be the reason.

Kwarteng will have to go for sure but if he goes, Truss must go with him. It's not as if he was off pursuing some rogue policy like Nigel Lawson under Margaret Thatcher when he was shadowing the Deutschmark. The unfunded tax cutting and the method of announcing the policy, firing The Treasury permanent secretary, and sidelining the OBR were all decided and agreed upon in No 10. They either stand together or fall together.

And since what has happened in the last three weeks is hardly out of the ordinary for Truss - her entire career has been one long gaffe - I do not see her lasting until Christmas. I think Tory MPs have had enough and are now looking at how they might save their own skins and that of the party itself.

Meanwhile, polling gets worse, with the latest showing a 34-point lead for Starmer and Labour. This is annihilation territory for the Tories and would easily see them down to double figures. 

If Farage was to resurrect UKIP or create a new far-right alternative, something which is by no means out of the question - we know he's unhappy about immigration and tax rises - it will spell the end of the Conservative party as we know it. This might not be a bad thing, allowing moderates to recapture it and bring a bit of sanity back into policy-making.

And another YouGov poll at WhatUKthinks reinforces the recent trend with those who think Brexit was Right down to  34 percent and those thinking it was wrong at 52 percent. The graph now looks like this:

Right is in blue and Wrong in green:


By the middle of next year, I think we will be in the 30-60 area (10 percent don't know) which would give us around 34 - 66 when the undecideds are removed. When the polling reaches that sort of level (and it will at some point) even the Tory party will have to recognise that Brexit has failed. And if they ever want to return to power, someone will have to admit Brexit has been a mistake.

Who will do it?

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