### Summary
The UK's public debt has risen by over 40% to nearly ÂŁ2.6 trillion ($3.3 trillion) since the pandemic began, leaving the country owing more than its annual economic output. The heavy reliance on index-linked bonds and high inflation means that the UK will pay more to service its liabilities than any other advanced economy, raising concerns about the country's credit rating and long-term economic stability.
### Facts
- The UK's public debt has soared by more than 40% to almost ÂŁ2.6 trillion ($3.3 trillion) since the pandemic began.
- The UK now owes more than its entire annual economic output for the first time since 1961.
- The country's reliance on index-linked bonds at a time of high inflation means that it will pay more to service its liabilities than any other advanced economy.
- The Office for Budget Responsibility has warned that without action, the country's debt could reach more than three times its gross domestic product in the next half century.
- Concerns have been reignited about the UK's credit rating, especially after Fitch stripped the US government of its AAA status.
- The Bank of England's rate hikes to quell inflation have led to a selloff in bonds, making the UK bond market one of the worst performers this year.
- Both the Conservative-led government and the Labour leader have few options to address the country's debt burden and stagnant economy.
- The three main credit-rating firms are scheduled to update their assessments of the UK over the next four months.
- The UK has already lost its top credit rating from Moody's and Fitch, and a further downgrade could have a severe impact on UK assets.
- The UK's debt-interest bill is the largest share in the developed world, accounting for 10.4% of revenue this year.
- Linked gilts, a type of bond, now account for a quarter of outstanding UK bonds and pose a burden on public finances.
- The UK's public finances have been under pressure due to a string of shocks over the past 15 years, including the financial crisis, the pandemic, and Russia's invasion of Ukraine.
- The Bank of England's efforts to control inflation are exacerbating the UK's public finances, as higher rates compound losses on reduced bond holdings.
- The Conservative government may be tempted to loosen the purse strings before the election, but this could impact the country's credit rating.
- Labour has acknowledged that it will have to delay a plan to invest ÂŁ140 billion in green industries over five years.
- The long-term outlook for UK debt is bleak, with warnings that it could reach over 300% of GDP by the 2070s.
Stocks are overvalued and a recession is expected in the first half of next year, according to economist Steve Hanke. He predicts that inflation will cool, Treasury yields will fall, and house prices will remain stable.
Britain's experience with quantitative easing (QE) and monetary policy has had both positive and negative impacts, with the unnecessary prolonged period of cheap money causing damage, the kamikaze printing of money during the pandemic feeding inflation and leaving taxpayers with a large bill, but also some good news as inflation is expected to decelerate and boost spending power as real incomes rise, although second-round effects could ensure inflation's persistence. The UK economy is weak and policy should focus on averting recession and challenging consensus-thinking on future growth, as the country's composite Purchasing Managers Index (PMI) has fallen to a 31-month low, with the services sector slipping into recession and a slump in retail sales in August. Higher interest rates are causing corporate distress, suggesting the need to stop raising rates, while elevated policy rates and selling of gilts by the Bank of England will keep upward pressure on long-term yields and borrowing and mortgage rates. The expectation of positive real interest rates signals the end of cheap money and offers an opportunity in Britain to rethink fiscal and supply-side policy, encouraging investment, innovation, competitiveness, and improved skills. Overall, the outlook is characterized by falling inflation, weak growth, and the opportunity to reset monetary policy and focus on fiscal policy, the supply side, and investment.
The first nine months of 2023 have shown resilience in the market, with the Fed's tightening cycle dragging it higher, and there are concerns about wages, geopolitics, and weather impacting the economy.
Investors are focusing on the release of economic reports on GDP and inflation as they evaluate the Federal Reserve's stance on interest rates and its efforts to cool down inflation. Metal prices have slipped due to concerns over global demand and the economy, and the risk of a government shutdown is also adding to the bearish sentiment. Earnings reports from various companies and core PCE inflation data are expected in the week ahead.
Concerns surround the upcoming release of U.S. payrolls data and how hawkish the Federal Reserve needs to be, as global markets experience a period of calm following a tumultuous week that saw Treasury yields rise to 16-year highs, crude oil prices drop, equities decline, and the yen strengthen. Japanese government bond yields are also causing concern, as investor sentiment towards the Bank of Japan's stimulus remains low.
