Labour’s Truss scale shock: Bond gap with Germany at highest level in 34 years: ALEX BRUMMER
One of Britain’s major advantages at the moment over European competitors Germany and France is political stability.
The election with a stunning majority for a Labor government promised some much-needed post-Tory calm
anxiety and hope that bond yields, which help determine the cost of fixed-rate home loans, would ease from the peaks seen after Liz Truss’s disastrous mini-Budget.
It wasn’t like that at all. You would expect UK government bond yields to trend towards those in Germany, where the ratio of government debt to national output is a creditable 63.5 percent.
The government in Germany has fallen and France is ruled by the most fragile coalition.
The economy the Tories handed over to Keir Starmer was in poor health; Britain is expected to be among the fastest growing G7 economies this year and next, and inflation was on track.
Blunders: Prime Minister Kier Starmer and Chancellor Rachel Reeves inherited an economy in poor health, with Britain expected to be among the fastest growing G7 economies this year
Instead, a 2.30 percentage point gap has opened up between the yields on ten-year UK government bonds and government bonds and those on German government bonds.
The gap is at a 34-year high and wider than at the time of the Truss tantrum in 2023. At 4.5 percent, British bond yields are much higher than those of France and Italy.
Until recently, the difference could partly be explained by the economic outlook, with Germany and France heading towards recession and stagnation respectively as the UK economy accelerated.
That is no longer the case at all. In six months, Labor, which came to power promising change and growth, has shown itself to be economically inept. Chancellor Rachel Reeves’ promise to “repair the foundations” has proven to be a chimera.
The cost of living rose to 2.6 percent in November, up from 2.3 percent the month before.
This follows closely on the heels of figures showing wage growth accelerated from 4.9 percent in the previous three months to 5.2 percent.
The increase was largely driven by the private sector. The negative impact of Labour’s generous, productivity-free deals with the public sector and a jump in the minimum wage cannot be discounted.
At a time when central banks around the world are cutting interest rates to boost output, the Bank of England is expected to keep interest rates at 4.75 percent at today’s monetary policy committee meeting.
This is in contrast to the European Central Bank, which cut short-term interest rates to 3 percent last week and the US central bank, the Federal Reserve, which last night cut borrowing costs by a quarter of a percentage point to 4.25 per cent. cents-4.50 percent range, the third consecutive move.
The caution on Threadneedle Street is largely driven by rising labor costs and the deviation from inflation targets.
Rachel Reeves’ decision to collect an extra £25 billion from businesses by increasing employers’ national insurance has been a disaster.
Because the money is being sprayed onto the public sector without efficiency targets, it does nothing to alleviate the government’s debt and debt burden.
It does the exact opposite. Many companies raise prices to cover costs. That, in turn, will make it more difficult to achieve the 2 percent inflation target, keeping interest rates high for longer, which will increase the cost of servicing the national debt.
Yet in a disingenuous comment yesterday, the Chancellor continued to insist that she had not increased taxes on working people.
Not directly: but the rise in national insurance has hit the business and employment prospects for working people hard and increased the cost of filling shopping trolleys.
Just how severe the shock to the country’s economic prospects has proven to be is illustrated by the latest research from employers’ organization CBI.
The love affair with Labor appears to be over. The report notes that ‘business confidence has collapsed in the wake of the budget, driving up costs’ and leading to investment cancellations. Industrial production has fallen at the fastest pace since mid-2020 – the peak year of the pandemic.
The Bank’s appropriate response to a setback of this magnitude should be to cut rates sharply. In the short term there may be a price increase, but this is unlikely to continue as demand declines. The Bank claims its actions are driven by data.
The Old Lady must please Reeves, her former employee, to avoid stagnation or worse.
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