The new British finance minister Zahawi inherits a failing economy, rising inflation

Britain’s new finance minister Nadhim Zahawi leaves 10 Downing Street, in London, Britain, July 5, 2022. REUTERS/Henry Nicholls

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

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

The former education minister – who co-founded polling firm YouGov before entering parliament – will also be expected to play a key role in resolving the still unfinished business of Brexit with Britain and the European Union.

The standoff over trade rules for Northern Ireland could yet lead to increased barriers to British exports to the bloc.

In April, the International Monetary Fund forecast that Britain would face slower economic growth and more persistent inflation than any other major economy worldwide in 2023.

Since then, sterling has fallen further and fell to 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 predicts it will reach 11% in October.

With the Bank of England raising interest rates and falling confidence among households and some businesses, Britain’s gross domestic product contracted in April and is expected to contract in the second quarter as a whole.

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

But with growth likely to slow next year, Conservative MPs have called for VAT cuts in the autumn – a move that would potentially cost tens of billions of pounds.

That would add to a pile of British public debt that has ballooned to over £2 trillion ($2.39 trillion) during the coronavirus pandemic and now stands at nearly 96 percent of GDP.

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

In announcing his resignation on Tuesday, Sunak – who has often stressed the importance of fixing public finances – said it had become clear to him that his approach to running the economy was “too different” from Johnson’s.

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 does stick around, markets could expect more generous tax and consumption allowances now that Rishi Sunak has left, which in turn would increase pressure on the BoE to do more, potentially providing some support for sterling,” she said.

($1 = 0.8363 pounds)

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

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