What future for the British economy with the departure of Boris Johnson?

Prime Minister Boris Johnson’s resignation adds uncertainty to the UK economy, already strained by double-digit inflation, the risk of recession and Brexit.

The race to replace Johnson, who announced on Thursday that he would be stepping down, could take weeks. That would leave the world’s fifth-largest economy at risk of drifting further at a time when the pound is near a two-year low against the dollar and the Bank of England faces a dilemma over rising interest rate without harming economic activity.

The length of Conservative Party leadership races varies. Theresa May needed less than three weeks to win after David Cameron left in 2016 as other suitors dropped out.

But it took Johnson two months to become the new leader after May announced her intention to step down in 2019.

At least half a dozen candidates are expected this time around.

Here is a summary of the key questions hanging over the UK economy as the political drama unfolds.

INFLATION

Even more than many other countries, Britain is feeling the pressure of an inflation rate of 9.1%, its highest level in 40 years. The BoE thinks it will reach 11% later this year.

The International Monetary Fund said in April that Britain faces more persistent inflation, as well as slower growth, than any other major economy in 2023.

The recent fall in the pound has added to inflationary pressures since then, although the prospect of higher government spending or tax cuts to shore up the fortunes of the Conservative Party sent the pound up a bit on Thursday.

But whoever replaces Johnson will be able to do little to offset the impact of soaring global energy and food prices.

TAX POLICY

Whoever succeeds Johnson faces big tax and spending decisions that could reduce the risk of a recession but could also add inflationary heat to the economy.

When he stepped down as finance minister on Tuesday, Rishi Sunak said he disagreed on policy with Johnson, who had long called for more tax cuts. Sunak’s short-term priority before his resignation was to ease Britain’s debt burden, which jumped above £2 trillion during the coronavirus pandemic.

Analysts at US bank Citi said they expected Conservative Party leadership candidates Priti Patel and Liz Truss, who served as Johnson’s home and foreign ministers, to call for rapid tax cuts and increased spending, while Sunak and former health minister Sajid Javid were likely to be more fiscally cautious.

The long-term implications of their decisions will be high.

Britain’s fiscal watchdog said on Thursday that debt could more than triple to almost 320% of GDP in 50 years if future governments do not tighten fiscal policy.

BREXIT

More than six years after Britain voted to leave the European Union, London and Brussels remain at loggerheads over Johnson’s insistence on rewriting the rules – which he agreed to in 2019 – for trade involving Northern Ireland.

The possibility of improved relations with the EU under a new Prime Minister has prompted some economists to predict an increase in British exports and investment, although any change in the overall trading relationship is likely to be modest.

Moreover, some of the favorites to replace Johnson, principally Foreign Secretary Truss, have publicly backed his combative stance towards the EU.

BANK OF ENGLAND

Britain’s central bank has raised interest rates five times since December, its biggest hike in 25 years, and has signaled it will continue to raise them, perhaps as much as half a percentage point when its next meeting in August.

But the risk of a global economic slowdown has recently reduced investors’ bets on this kind of big BoE move. Uncertainty about the direction of UK fiscal policy could be another reason for caution.

MORE POLITICAL CHAOS?

As Johnson’s exit caps another chapter in one of the most tumultuous periods in modern British political history, it remains to be seen whether his successor will be able to calm things down.

Kallum Pickering, an analyst at Berenberg, said the UK economy would benefit from replacing Johnson with “someone more diligent and serious”.

But Citi analysts said they were skeptical about unifying the various factions within the Conservative Party around a clear strategy.

“In the months ahead, we see a UK heading for a unique squeeze in living standards, with no defined strategy and facing deep government division. The risk of deep political error is therefore significant,” they said.

“An early election should also not be ignored, although we still expect a contest only in 2024.”

(Writing by William Schomberg; Editing by Mark Heinrich)

Boris Johnson has faced a succession of scandals and crises

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