The UK Economy: Apocalypse Now? Black Wednesday, Mark 2? Not quite. But if social media’s hot takes on the state of the UK economy are wide of the mark, the pressure on Kwasi Kwarteng and the Bank to restore credibility is now immense. The good news is that will not be as difficult as some seem keen to make out.
Admittedly, Wednesday evening’s hastily put-together letter from the Treasury to government departments telling them to find efficiency savings will not be up to it. But the pathway is relatively clear – it will involve the government bringing forward its next fiscal event (and the accompanying forecasts from the Office for Budget Responsibility) and clear guidance from the Bank of England with regards to further interest rates.
It remains this column’s view that an emergency rate rise this week would have looked rash – it similarly remains this column’s view that to rule a move out before November, as the Bank did on Monday, was equally unwise. Assuming those projections aren’t totally apocalyptic and the Bank doesn’t (yet again) surprise to the downside, there is a path to be trod.
Sterling is unlikely to recover overly quickly, but as the chart over the page shows, currency weakness is not really the story. It is the cost of government borrowing, and that is based around credibility.
Alas, social media has done us no favours on that front. One wonders if governments and central banks would have been able to turn the global economy around in 2008 if every Tom, Dick and Harry with a penchant for the dramatic took to tweeting their latest understanding of every up and down of the cable.
But neither has the Bank’s inability to call inflation over the past eighteen months, which had already damaged the credibility of the institution before Monday’s debacle. Wednesday’s intervention, as some have argued, would have been better made earlier this week, but it was necessary, sensible and fundamentally a sign that the Bank will remain on standby to clear up any further unpleasantness.
Amid the sound and fury, Kwarteng must show his working – sooner rather than later. We remain optimistic about the supply side reforms government has promised us – moves that could give our trundling economy a welcome growth boost. But to get there, you need to keep the markets onside. It’s not started well.