Truss confuses pundits: ALEX BRUMMER says pessimistic analysts should support UK recovery, not belittle the country
Sometimes you wonder what the highly paid City analysts are smoking. One can understand why think tanks like the Resolution Foundation wallow in the UK’s energy woes and keep telling us how we could all end up in poverty.
Even The Archers, bastions of Land Rover driving and horseback riding values, has cast members who have visited a food bank.
But do the heavyweight investment banks really deserve it?
Panic stations: But the UK’s debt is modest compared to G7 peers like the US, Italy, Japan and even France
Citi was the first to emerge from the traps in mid-August, forecasting that UK inflation could peak at 18 per cent this winter as energy prices soar.
Goldman Sachs was aiming for an even bigger figure of 22 percent, so as not to be outperformed.
Amid the panic stations and the arrival of the tax-cutting Liz Truss at Downing Street, the call to ‘shed Sterling’ was loud and clear.
Deutsche Bank (which knows it’s a serial loss maker) joined the clamor, arguing that Britain was facing a balance of payments crisis that could send sterling down 30 percent.
The Deutsche Bank strategist cited a combination of aggressive fiscal spending, the energy shock and a decline in sterling as a death loop that could lead to a repeat of 1976, when the country fell into the arms of the International Monetary Fund.
Maybe. But perhaps Deutsche Bank hadn’t noticed that Britain’s debt levels are modest compared to G7 peers like the US, Italy, Japan and even France.
It’s one of the reasons Truss feels able to devote a slew of resources – at least £140billion – to skinning the cost-of-living crisis this winter.
The notion that Britain is uniquely experiencing some form of currency meltdown also needs to be corrected.
The pound’s fall against the dollar is bad, but so are the euro and the Japanese yen. As measured by an index of the currencies of the nations with which the UK trades, the pound sterling is well above the 2016 and 2020 lows.
A widening current account deficit should correct itself on the back of a cheaper pound, which will help us sell more goods and services abroad. A current account deficit only becomes a problem when it cannot be financed.
Britain is not Sri Lanka, which has been kept afloat with the help of Chinese and Indian creditors. We actually have no foreign national debt.
There’s an endless appetite for British domestic debt or gilts from our Gulf friends (who, by the way, are passionate about British property) and billionaires from Norway, Singapore and Hong Kong fleeing Beijing.
Foreign central bank holdings of gilts rose to $580 billion in the first quarter of the year. Domestic holdings are also strong, bolstered by the tightened capital requirements for banks and insurance companies that followed the financial crisis.
Rising yields as the Bank of England tightens its anti-inflationary stance and the terrific yields from the UK’s major inflation-linked bond issue also make gilts a favorite of fund managers.
As Boris Johnson emphasized in his farewell address to Number 10, the UK is the world’s most attractive location for technology and science investments outside of the US.
The war in Ukraine and the energy crisis have pushed up inflation in Britain and political upheaval has cast the country in shadow.
Finally, the government is taking a crucial step to freeze energy prices and curb much of inflation. If that doesn’t improve business and consumer confidence and stimulate spending, then it won’t.
Nicola Sturgeon is greatly admired for speaking out.
But a friend, who is leading one of Britain’s biggest aid operations abroad, was less than impressed when the Scottish First Minister warned that Britain faces a “humanitarian crisis” if the energy price ceiling is not frozen.
He pointed out that a humanitarian crisis is taking place in Pakistan, where tens of thousands of people are sleeping outdoors after devastating floods.
This is exactly what has happened in Ukraine, where millions of refugees have fled the war zone and those left behind are searching for food and shelter among the rubble.
And that is exactly what is happening in Yemen, Darfur and other long-forgotten parts of the developing world.
Buying an extra cardigan and visiting a food bank when universal credit and the energy subsidy have run out isn’t quite enough.