Kwasi Kwarteng returns early from IMF as markets price in more U-turns – business live

Credit Suisse’s head of UK economics, Sonali Punhani, has warned that the UK’s recession could be worse than expected because of the recent market turmoil.

• Owing to the market turmoil that has followed the announcement of the mini-budget, risks are rising that the recession in the UK is deeper than we forecast. If the market moves are sustained or worsened, they can offset the impact of the tax cuts and increase the depth of the recession through much higher mortgage costs and currency-led inflation.

• Real incomes could be squeezed further by 1-1.5% in 2023 if the recent market moves are sustained, which is likely to add downside risks to our growth forecast of -0.2% in 2023.

• For the moves to stabilise, the Bank of England would need to restore credibility by hiking aggressively in the near term. We expect the BoE to hike 100bps in November and raise rates to 4.5% by early 2023.

• More importantly, the markets would need to see a credible fiscal plan on October 31 to reverse these moves, in our view. We calculate that fiscal tightening of 2.5% of GDP (£60bn) in 2026-27 would likely be needed to stabilize the debt to GDP in the medium term. This is possible via a combination of a U-turn on tax cuts (being discussed and look possible) as well as spending cuts. It would be challenging to deliver the scale of these cuts, but for them to be credible, these need to be delivered sooner rather than in the latter part of the forecast.

European stock markets are rallying at the open, along with the government bond markets. The FTSE 100 index in London is 1.4% ahead at 6,943, a gain of 92 points. The German market has risen 1.6%, the French and the Spanish indices are both up 1.5% and the Italian and Portuguese markets have jumped 1.7% and 2.2% respectively.

The rally has pushed yields on UK government bonds, known as gilts, lower – lowering the cost of government borrowing. The yield on the two-year gilt has fallen 16 basis points to 3.69%, the lowest since the disastrous mini-budget was announced on 23 September.

The 30-year yield has also fallen further, by 14 basis points to 4.4% while the 20-year yield is at 4.6%. On Wednesday, both jumped above 5.1%. The 10-year bond is yielding 4.01%, the lowest since 6 October.

Phillip Inman

My colleague Phillip Inman has looked at what dropping various measures from the mini-budget might save, and what else might be jettisoned or delayed from Kwarteng’s unfunded £43bn tax-cutting package.

Liz Truss is on the verge of reversing one of the last major pillars of her chancellor’s disastrous September mini-budget.

While Kwasi Kwarteng mingled with finance ministers at the IMF gathering in Washington DC before dashing back a day early, discussions are taking place in London that would see the promise to freeze corporation tax rates binned.

There is also speculation about dropping smaller measures including a more generous tax treatment of share dividends. These U-turns would come hard on the heels of the humiliating climbdown on Kwarteng’s promise to scrap the 45p top rate of tax.

Whether those reversals will be enough to calm the market turmoil that followed the mini-budget remains to be seen.

Bankers’ bonuses double since 2008 crash

Rupert Neate

Bankers’ bonuses have doubled since the 2008 financial crash, according to research by the TUC, which accuses the government of enriching City financiers while “holding down” the pay of key workers.

The unions’ umbrella body said bonuses in finance and the insurance sector have reached a record £20,000 a year on average – which it says is almost one-and-a-half times the average pay collected by teaching assistants.

The TUC found that average City bonuses increased by 101% in cash terms between 2008 and 2022, prior to the chancellor, Kwasi Kwarteng, announcing plans last month to scrap the bankers’ bonus cap.

“Everyone who works for a living deserves to earn a decent living, but ministers are holding down the pay of millions of key workers, while lining the pockets of City financiers,” said Frances O’Grady, general secretary of the TUC. “There is simply no justification for lifting the cap on bankers’ bonuses – especially when nurses and teaching assistants are having to use food banks to get by.

Royal Mail could cut up to 10,000 jobs

Mark Sweney

Royal Mail has said it may need to cut up to 10,000 roles by next August, blaming strike action by its workers and the continuing decline of its core business.

Royal Mail said that this figure includes the cost of eight days of strike action that have taken place, and two more planned days of action notified by the Communications Workers Union (CWU) on 20 and 25 October, adding that the loss could rise to as much as £450m if customers turn to rivals due to ongoing disruptions to its delivery services.

The company said that it needs to cut up to 6,000 full time frontline roles in delivery and processing by March and seek an overall reduction of 10,000 full time equivalent roles by next August. This is out of a workforce of 140,000.

We will be starting the process of consulting on rightsizing the business in response to the impact of industrial action, delays in delivering agreed productivity improvements and lower parcel volumes.

Wherever possible, we will look to achieve FTE rightsizing through reductions in overtime, temporary staff and natural attrition.

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Kwasi Kwarteng has cut short his trip to the International Monetary Fund’s autumn meeting in Washington, flying home early as the political crisis over his tax-cutting mini-budget intensifies.

Adding to signs that the government is preparing to announce a U-turn over its plan to scrap a rise in corporation tax, the chancellor left the US capital a day earlier than planned. He spent two days there, and was publicly dressed down by Janet Yellen, the US Treasury secretary, at a meeting of G7 finance ministers and central bank governors, who warned that tax cuts that required extra borrowing posed a risk to financial stability. The IMF said yesterday it would welcome changes to the mini-budget.

Kwarteng’s unscheduled departure on a late-night flight from Washington capped another febrile day in Westminster and prompted comparisons with the sterling crisis suffered by the Labour government in 1976. Then, the chancellor Denis Healey turned around at Heathrow rather than fly out to an IMF meeting in Manila after pressure mounted on the pound.

UK government bonds rallied yesterday, and the pound surged on reports that the government will execute further U-turns on its recent mini-budget, a package of unfunded tax measures that triggered market turmoil.

This morning, sterling has slipped 0.1% to $1.1315, but is hovering near a one-week high against the dollar.

Michael Hewson, chief market analyst at CMC Markets UK, says:

While 10 Downing Street has denied such a U-turn will happen, markets seem to think that the chancellor won’t have a choice, and his early departure from the IMF meetings in Washington appears to suggest that something is afoot.

There is also an expectation that whatever the Bank of England and governor Andrew Bailey says about ending the support for the gilt market today, if we get further turbulence next week, they will have little choice but to step in and provide liquidity to the market.

The rebound in the pound was also helped by a sell-off in the US dollar, on an expectation that we could well see more aggressive hikes from the ECB and the Bank of England in response to a more aggressive Federal Reserve.

The Bank of England’s emergency bond-buying programme, announced on 28 September to calm nerves and prevent a run on pension funds, ends today.

Wall Street staged an impressive comeback yesterday after early heavy losses as investors shrugged off hotter-than-expected inflation data, and UK and European shares also closed higher.

In Asia, stock markets have rallied on hopes of more Chinese stimulus and speculation about more U-turns on the UK’s fiscal plans. Japan’s Nikkei rose 3.5%, Hong Kong’s Hang Seng has gained 2.7% and the Shanghai composite is up 1.8%. European shares are also expected to open higher.

The Agenda

• 10am BST: Eurozone trade for August

• 1.30pm BST: US Retail sales for September (forecast: 0.2%)

• 3pm BST: US Michigan consumer sentiment for October (forecast: 59)