Britain’s new finance minister, Zahawi, inherits a shaky economy and runaway inflation

LONDON, July 5 (Reuters) – Britain’s new finance minister, Nadhim Zahawi, takes the reins of an economy struggling with near double-digit inflation and a slowdown that promises to be more severe than in most other major nations of the world.

Like his predecessor Rishi Sunak, Zahawi will face pressure to spend more and cut taxes from lawmakers in Prime Minister Boris Johnson’s Conservative Party, who have been stung by a slump in the party’s popularity.

The former education minister – who co-founded opinion polling firm YouGov before entering parliament – is also expected to play a key role in settling the still unfinished Brexit deal with Britain and the European Union.

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A stalemate over trade rules for Northern Ireland could further lead to increased barriers for British exports to the bloc.

The International Monetary Fund predicted in April that in 2023 Britain would face slower economic growth and more persistent inflation than any other major economy in the world.

Since then, the value of the pound has fallen further and hit a two-year low against the US dollar on Tuesday, which will add to inflationary pressures in Britain.

Inflation hit a 40-year high of 9.1% in May and the Bank of England expects it to reach 11% in October.

With the Bank of England raising interest rates and consumer and some business confidence plummeting, Britain’s gross domestic product contracted in April and is expected to contract throughout the second quarter.

Most economists believe that in the short term it will avoid the technical definition of a recession – two consecutive quarters of contraction – thanks in part to the latest emergency cost-of-living support measures announced by Sunak in May.

But with growth likely to slow to a halt next year, Conservative Party lawmakers have called for a cut in value added tax in the fall – a move that would potentially cost tens of billions of dollars. books.

This would add to Britain’s public debt pile which topped £2 trillion ($2.39 trillion) during the coronavirus pandemic and now stands at almost 96% of GDP.

Johnson and Sunak have reportedly often disagreed over how much more the government should borrow.

In his resignation announcement on Tuesday, Sunak – who has frequently stressed the importance of fixing public finances – said it had become clear to him that his approach to managing the economy was “fundamentally too different” from that of Johnson.

Sarah Hewin, senior economist at Standard Chartered, said shortly before Zahawi’s appointment that it was difficult to see how Johnson could continue as prime minister.

“If he hangs on, markets can expect more generous tax and spending giveaways now that Rishi Sunak is gone, which in turn would increase pressure on the BoE to do more, providing potentially support for the pound,” she said.

($1 = 0.8363 pounds)

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Additional reporting by Sujata Rao-Coverly Writing by William Schomberg, editing by Deepa Babington

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