Despite the media narrative, the UK remains in relatively good financial health
After a turbulent political period in Britain, existing hardships have once again risen to the surface. Inflation has surpassed 10% in 2022, while wages have failed to keep pace. Dockers at the UK’s fourth largest port have staged another walk-out, which in turn has garnered wide public sympathy. Food bank use is 35% above pre-pandemic levels.
This was all captured in a recent Politico article, soberly entitled ‘Where Britain went wrong’. Its conclusion? That Britain had once again becoming ‘the sick man of Europe’. Just a couple of weeks before, we even saw ‘Britaly‘ appear on The Economist‘s front cover, too.
But there is reason to believe the worst is now over for Britain. Indeed, the latest economic data is quite promising. Pound sterling has strengthened from £1.03 against the US dollar to almost £1.12, while Gilt yields have stabilised and fallen. Even producer price inflation has begun to dwindle.
This economic recovery occurred in spite of the ensuing political chaos. Liz Truss had to resign, failing to outlast an iceberg lettuce. Suella Braverman, after breaching security rules relating to email use and quitting as Home Secretary, has been reappointed by new Prime Minister Rishi Sunak. There were even fears of a balance of payments crisis, an episode reserved for only the most fragile emerging markets.
The UK, for all its recent political instability, remains in good financial health. With a large cushion of foreign exchange reserves, it has been borrowing at a negative real rate of interest. On top of this, the country’s ability to repay debt remains unrivalled throughout history. Minus a few defaults in the Middle Ages, Britain possesses the world’s best repayment record.
The UK endured because the real problems it faces have been shared on a global stage. Against the US dollar, the number one global risk monitor, the euro, the Canadian dollar, and most other G7 currencies also started to recover on the same day after the Bank of England rescue. Plus, Gilt yields fell to just above the yields of US Treasuries and euro area bonds. The political Gilt debacle was in no way pointing to social or currency collapse in Britain. Instead, the political establishment just managed to trigger one of the only scenarios that could induce market chaos.
With the UK’s political turmoil quelled, the status quo of global disorder has revealed itself. The inflation fear narrative has peaked for now, so the new hysteria involves a rising US dollar, fuelled primarily by the Federal Reserve’s aggressive interest rate hikes. The slow decline in the pound and Gilts selling off before the political carnage was down to the markets pricing in usual currency moves associated with higher US interest rates compared to the rest of the world.
Indeed, the UK faces the same set of difficulties arising from this as its foes and allies. Ignoring a few blunders, Britain remains in good standing compared to its neighbours, and more serious chaos can be found on mainland Europe. Persistently sky-high PPIs and CPIs across the middle continent are more concerning than one episode of — frankly predictable — British political disorder.
Greg Barker is an independent journalist and quant, who also writes under the name Concoda. You can find him on Substack and Twitter at @concodanomics.