What
IS going wrong
with the
UK• Великобритания economy? How a
spike in debt servicing costs
threatens
to derail
Labour as '
Stagflation' fears
mount... and
Pound• Экономика » Финансы » Платежные средства » Лира (валюта) is branded
the 'Great British Peso'
What IS going wrong with the UK• Великобритания economy? How a spike in debt servicing costs
threatens to derail Labour as 'Stagflation' fears mount... and Pound• Экономика » Финансы » Платежные средства » Лира (валюта) is
branded the 'Great British Peso'
By JAMES TAPSFIELD, POLITICAL EDITOR FOR MAILONLINE
Published: 12:16 GMT, 10 January 2025 | Updated: 12:25 GMT, 10 January 2025
e-mail• Коммуникации » Интернет-коммуникации » Электронная почта
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comments
A major plank of Keir Starmer 's pitch at the election was that Labour would
bring much-needed stability to the UK• Великобритания economy .
But those promises now have a distinctly hollow ring, as the government
grapples with a major market backlash.
Traders have been heaping risk premium on the state's borrowing, with yields
on gilts at the highest levels in decades. Meanwhile the Pound• Экономика » Финансы » Платежные средства » Лира (валюта) has been
dropping against the US dollar and the euro, leading one City analyst to
jokingly name it the 'Great British Peso'.
Chancellor Rachel Reeves is looking down the barrel of trimming her spending
plans or imposing yet more tax hikes in the coming months.
So what has gone wrong with the economy, and how bad could things get?
A major plank of Keir Starmer's pitch at the election was that Labour would
bring much-needed stability to the UK• Великобритания economy
Donald Trump's threat to impose 'beautiful' tariffs have sparked alarm about
the potential for another inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция surge and lower growth
Traders have been heaping risk premium on the state's borrowing, with yields
on gilts at the highest levels in decades (chart shows 10-year gilts rate)
Is it the global economy, stupid?
There is no doubt that Government bonds have been taking a pasting around the
world.
Donald Trump's threat to impose 'beautiful' tariffs have sparked alarm about
the potential for another inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция surge and lower growth.
Concerns have been raised about 'sticky' prices in America and the prospect of
an extra $6trillion of debt, meaning interest rates on US Treasury bonds are
up sharply.
However, the UK• Великобритания does appear to have been harder hit than many other countries.
The yield on 10-year gilts - the way the government raises money - has topped
4.8 per cent for the first time since the financial crisis• Финансовый кризис of 2008.
Interest on 30-year gilts has risen from around 4.35 per cent in September to
reach a 27-year high of 5.38 per cent.
At the same time the Pound• Экономика » Финансы » Платежные средства » Лира (валюта) has seen significant falls against both the US
dollar and, to a lesser extent, the euro.
That is an unusual combination because higher interest rates on bonds tend to
bolster the currency.
A Bloomberg metric also suggests that, although the government is still
comfortably able to raise the money it needs, liquidity has been worse in the
UK• Великобритания bond markets than elsewhere. That could sign that investors are staying
away.
Critics argue that the government's moves so far have actually crushed
economic activity
So why are things looking worse in Britain?
There has been a sense for some years that financial markets are sceptical of
Britain's• Великобритания prospects.
Sterling fell precipitously against the dollar after the 2008 credit crunch,
and has never really recovered - seeing another sharp decline around the time
of the Brexit• Объект организация » Организации по алфавиту » Организации на Ев » Евросоюз » Выход Великобритании из Европейского Союза vote in 2016.
The currency has clawed back some ground after reaching an historic low of
just $1.13 in the wake of Liz Truss's mini-Budget in 2022.
This is partly a story of US strength, as the tech revolution has been
dominated by American firms.
But UK• Великобритания stocks are often regarded as undervalued, and London• Великобритания » География Великобритании » Населенные пункты Великобритании » Города-сити Великобритании » Лондон
• Великобритания » Англия » География англии » Города Англии » Лондон has been viewed as
struggling to attract new listings.
Meanwhile, Britain has continued to rack up big debts - driven by wider
demographic factors and a series of crises such as Covid and the Ukraine war -
while successive governments have been unable to improve productivity, cut
benefits and get growth motoring.
The eye-watering inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция seen worldwide in recent years, with energy prices
a particular problem, also exposed deep-seated problems in the UK• Великобритания and obliged
the Bank of England• Великобритания » Англия to push interest rates to a 15-year high.
Britain has continued to rack up big debts - driven by wider demographic
factors and a series of crises such as Covid and the Ukraine war - while
successive governments have been unable to improve productivity, cut benefits
and get growth motoring
Wasn't this long-term decline what Labour was promising to tackle?
Sir Keir and Rachel Reeves have made boosting growth their top priority,
including using Labour's huge majority to force through difficult changes such
as planning system reform.
However, critics argue that the government's moves so far have actually
crushed activity.
The October Budget imposed £41billion of tax rises - the biggest hike ever
recorded at a single fiscal event, according to the OBR watchdog - mainly
targeted on employer national insurance.
Ms Reeves insisted that was needed to fill a £22billion 'black hole' left by
the Tories, but much of it went on a series of bumper public sector pay deals,
such as for NHS staff and train drivers.
Businesses are now warning they will be forced to increase prices, putting
upwards pressure on inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция, and cut back on jobs.
The Chancellor also rewrote debt rules to borrow around £70billion a year
more, saying it will be invested in improving infrastructure to drive growth.
However, the markets have become increasingly sceptical about the
effectiveness of Labour's strategy as evidence has emerged of a slowdown and
stubborn inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция - known as 'Stagflation'.
Ms Reeves' spending plans were already regarded by experts as implausibly
tight - and they have now been thrown into disarray by extra debt servicing
costs.
Doesn't sound great, but just how grim could it get?
The rise in gilts yields has been slower than the Truss meltdown, but levels
are now higher.
Some analysts have even warned that the UK• Великобритания is at risk of a 1976-style
disaster, when Denis Healey was forced to get a bailout from the IMF after a
Sterling crisis.
Others argue that the situation is rather different now, with interest rates
nowhere near as high.
If gilts yields stabilise where they are the IFS think-tank has estimated Ms
Reeves will need to find another £8billion a year to cover extra servicing
costs.
That would be enough to wipe out her spending 'headroom' but not huge in the
wider scheme of government budgets.
A key moment could come next week when the latest figures for headline CPI
inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция are released.
Your browser does not support iframes.
If that shows prices rising above expectations then concerns about the UK• Великобритания's
outlook could deepen.
It would deal a big blow to hopes that the Bank of England• Великобритания » Англия will cut interest
rates quickly to breathe life into the economy.
Ministers will also be braced for Trump's arrival in the White House later
this month, and whether Britain will be caught up in a feared trade war with
the EU.
But perhaps the biggest threat is the long-term malaise that seems to have a
grip on the UK• Великобритания, along with much of the West.
The focus on that will soon sharpen unless Labour can demonstrate that its
approach is really going to improve UK• Великобритания productivity, spread wealth and ease
the reliance on migration.
Rachel Reeves Labour