Britain’s economy is better than it looks
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.
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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.
“Britain’s economy is better than it looks”
Perhaps, rather, it is better than the media insist on portraying it.
I note much of the media seldom scrutinise the situation in other countries in the same way. A falling pound is always a disaster for the UK, despite us earning so much from abroad. Yet a fall in the Euro is so often portrayed as a boost for EU exports.
Why is that?
There is a subset of British people who, because of Brexit, would love to see the country’s economy fail. Like climate alarmists who cower after an unseasonably hot or rainy spell, they see every economic downturn as evidence of their predictions.
It’s the old joke about economists.
Ask five economists and you’ll get five different answers – six if one went to Harvard. (Edgar Fiedler)
Perhaps one of the experts on here can answer this question.
As the author of this article says the chances of the UK defaulting on it’s debt is vanishingly small. That is also my understanding. I’m just part way through reading a book by two FT economists about bonds and gilts who say that the chance of the UK defaulting is inconceivably small (their words). I assume they know what they are talking about. So the question is – why is the UK credit rating AA and not AAA?
That’s a good question, and deserves a considered reply.
There are three reasons:
We are relatively low-growth, due to poor productivity growth (which is what Truss and Kwarteng were trying to address).Too many government U-turns, especially concerning tax. Investors like predictability.The government is living beyond its means, so the debt burden will come down slowiy, if at all.
‘Better than it looks’ – begs a question on from where one is looking. Inevitable thus they’d be various perspectives. If you have paid your mortgage, got a good job, and in decent health etc then whilst tax rises and creaking public services unwelcome it’s more than manageable. If though you are already struggling, possibly needing health services, somewhere of your own to live and grow etc, then it’s going to feel quite different.
As regards our international comparison – we remain one of the world’s richest countries (even if a little less rich than we would have been but for some poor decisions), which is a source of comparative assurance. But it also challenges us on how we distribute and use that wealth.
The tendency to ‘catastrophise’ is what in part the author is cautioning against. And that seems wise advice. We have many challenges and calm minds make better decisions.
In fairness every society has/had/always will have people in the latter position that you describe. Life will always be hard for them and even the best systems will struggle to get them in a position where things aren’t stressful or difficult.
‘‘Ignoring a few blunders, Britain remains in good standing compared to its neighbours, and more serious chaos can be found on mainland Europe.”
Thats like saying ‘I am in pretty good health after my stroke; because my neighbor had a double stroke.’
£ is $1.13 now – in the 1970s it was $2.40, lost half its value, in WWII it was $5.
Inflation 10% – but higher in many ways, and wages falling behind. Inflation eating savings, rising interest increasing payments, but still… Interest you get minus inflation is a big negative real interest so your savings and pension melting away.
And no – the £ will not default, the BofE can print as many £ as they wish to cover any debt – even if they are worthless, they can be printed. Unless you talk about UK’s Dollar Denominated Debt – now that may not be easy to pay off…
2023 is looking to be really messed up – could be a depression – but then if you listen to people like the ex-Fed guy Lacy Hunt, Deflation will fallow after that, once this ‘Push Inflation’ resolves its self. And that is very bad indeed.
Maybe the writer can show how productivity is sufficient to cover costs – that is what it means to be doing well. We all remember Micawber giving that universal truth…
”“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness.Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery””
The writer should take this simple homily and use it to explain how UK is spending the sixpence, which side of the ledger it falls on – to prove his thesis.
Some MMT guy just down voted me….haha pity they did not explain the flaw in my reasoning….
So the Fed just did another 75 basis points – in what is called ‘Exporting Inflation to the World’….. and so UK did the same, now 3%…the big question is when is the ‘Pivot’? And then what? Crazy times coming.
We are not quite as clapped out as we thought! Well that is a nice thought, as I wait for for the lights to go out.
Yeah people can’t afford to put the heating on but the £ is slightLY better against the $. This article belongs on the BBC website.
As you imply, this is why everybody doesn’t bother reading about economics.
At this moment in time with the price cap AND the state help, there is no reason not to keep the heating on.
I am luckier than most and now I am paying LESS than 2 years ago. Had I been less lucky I would have ended up paying more or less the same as last year.
The Government paying much of your bill means working people are being taxed to pay your bill, or debt created so future working people will pay your bill – I guess that makes you lucky – although it makes them unlucky…….
I disagree. The BBC news website never contains articles which present the UK in a more favourable light than the usual commentariat. You’ve simply picked out one indicator from the article, and used it against a generalisation that the BBC would be proud of. There will no doubt be households where heating will be problematic this winter, despite the government subsidy, but that applies across most of Europe and therefore is no indicator of the UK being uniquely disadvantaged, which is the main thrust of the article.
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