Political Cynic’s offers a light rinse!

stephenkmacksd.com/

Jan 20, 2025

Opinion: UK economy

Headline: Britain’s situation remains fragile

Sub-headline: The government must retain the confidence of its creditors

https://www.ft.com/content/2890d3db-8bd1-4115-ba8a-612286123130

On January 13 2025, spreads between yields on 10-year gilts and German Bunds reached 230 basis points. This was four basis points higher than the peak reached on September 27 2022, when Liz Truss was prime minister. The UK is probably not heading for a borrowing crisis. But its position is fragile. The government must reinforce confidence in the soundness of the UK and its own good sense.

Interest rates have risen across the G7. Even in Germany, the yield on the ultra-long 30-year Bund rose by 290 basis points between January 15 2021 and January 15 2025. In the US, the rise was 300 basis points, and in France 350 points. Alas, the rise in UK yields was the highest in the G7, at 440 basis points. UK yields on 30-year gilts reached 5.2 per cent in mid-January. This was the highest level in the G7, while German yields were only 2.8 per cent and French ones still only 3.9 per cent. But US yields were not so far behind UK levels, at 4.9 per cent, probably because of the huge structural fiscal deficits in the global economic superpower.

In sum, UK yields on long-term debt have risen by more and reached higher levels than in peer countries. Yields on 30-year gilts were even 56 basis points higher than Italy’s on January 15. Moreover, while UK yields had risen 78 basis points in the previous year, Italy’s did not rise at all. That is embarrassing. A crucial question is why rates have risen. The big change has been in the real rate of interest, not inflation expectations. In the UK case, we have reasonably robust measures of both, from yields on index-linked and conventional gilts. The difference between the two indicates inflation expectations and perceptions of inflation risk.

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Editor: The Reader just might look at 14 years of Tory Economic incompetence, succeded by Kier Starmer’s ‘Tribute Band’s’ version: Tony Blairs wayward pupil, in the political present, has met the Liz Truss’ bench mark?

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Editor: Mr. Wolf maintaines his composure, as this whole essay remaines in the very high-flown register of ‘Economics’ , enuciated by a master of the genre!

In brief, the UK’s situation is fragile. The government needs to retain the confidence of its creditors. It is crucial not to adopt policies that raise doubts about its good sense. How taxes were raised in the Budget did just that. So, too, do regulatory developments, notably in the labour market. The government will have to toughen its stance on current spending in its coming review or consider higher taxes.

The UK must focus on resilience and growth. Panic is unnecessary, but the era of cheap borrowing is over. Policy has to respond.

Political Cynic