What if the UK lost market confidence and was forced to call on the International Monetary Fund (IMF), as in 1976? While Liz Truss took over as leader of the Conservative Party on Monday, September 5 – and therefore becomes Prime Minister of the British government – the hypothesis is beginning to be discussed in the City.
” (That) may sound extreme, but it is not without precedent: a combination of aggressive fiscal spending, a severe energy shock and a falling pound sterling eventually required IMF assistance in the 1970s., underlines Shreyas Gopal, an analyst at Deutsche Bank, in a note published on Monday. For the moment, he recognizes that the hypothesis remains improbable. “The UK retains several lines of defense against a sudden shutdown [des marchés financiers]. » But he specifies: “The risks are growing. »
Huge current account deficit
The parallel is tempting. Against the dollar, the pound sterling is at its lowest since 1985, at 1.15. The United Kingdom is probably already in recession: its gross domestic product fell by 0.1% in the second quarter, and the gas crisis, which affects all of Europe, has since worsened the situation. The British are suffering a violent shock due to the drop in purchasing power. Inflation is 10% and, in October, household gas and electricity bills will have almost tripled over one year.
But, above all, underlines Mr. Gopal, the United Kingdom is facing an abysmal widening of its current account deficit (the sum of the trade balance and the financial flows entering and leaving the country), which reached in the first quarter 8 % of GDP, an absolute record. In other words, the country has never depended so much on the rest of the world for financing.
Even Rishi Sunak, the candidate beaten by Liz Truss to take the lead of the party, seriously evoked the hypothesis of a dark scenario. It would be “complacent and irresponsible” not to take seriously the risks of a British debt crisis, he told the FinancialTimes August 30.
Of course, the British economy is not the only one to be hit by the gas shock. “All of Europe is sick, it’s true, acknowledges Torsten Bell, director of the Resolution Foundation think tank. But the problem is that the UK was already sicker than the others before the war in Ukraine. » He is concerned about the combination of low growth, recorded for fifteen years, and high inequality: “Together, these two challenges are toxic. »
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