"The Truss Government has no margin for economic error. Global markets will punish both wayward language and any perceived flirtation with fiscal Peronism.
It must raise funds for the energy bailout – for poor and rich alike – and cover a 1pc cut in the National Insurance just as the Bank of England begins quantitative tightening and feeds an expected £10bn a quarter into the gilts market.
This is a delicate manoeuvre for a country with a structural current account deficit near 4pc of GDP (8.3pc this year), a net international investment position of minus £742bn, and a low savings rate, all evidence of a nation living beyond its means.
It is hazardous to depend on the kindness of foreign creditors in the middle of a violent repricing of the global bond market....
Nevertheless, it is untrue that the UK faces urgent debt constraints. The UK has the second lowest ratio of public debt to GDP in the G7 at 88pc (IMF data), lower than Canada (102pc), France (113pc), the US (126pc), Italy (151pc), and Japan (262pc). It has the safety buffer of a longer debt maturity.
It is also untrue this Government is pursuing a uniquely irresponsible fiscal policy. Until two weeks ago, the UK was the only G7 country pushing through rapid retrenchment so early after the pandemic, and the only raising taxes into a synchronised global downturn....
As for the energy package, I would be alarmed if I thought it was going to cost £100bn in the first year alone, as the Institute for Fiscal Studies has estimated – seemingly based on the premise that global gas prices will remain in the stratosphere for a long time.
An annual bill of £100bn is a tail-risk but it is not the most likely outcome. The rapid rebalancing underway in global energy use suggests that it will cost a fraction of that sum, and perhaps nothing at all beyond New Year.
The gas market has already called Putin’s bluff. The benchmark TTF contract for October gas futures has fallen from €350 to €173 per megawatt hour since the Kremlin halted all flows through the Nord Stream 1 pipeline to Europe. Goldman Sachs thinks prices will fall to €100 by the time we get to winter.
The mid-price for liquefied natural gas delivered to the UK peaked at $75 per metric million British thermal units (MMBtu) on August 28. It is under $33 MMBtu today. Apologies for the different currencies and measures, but you get the picture.
The bidding war for global supplies during the summer is over. German storage is at 90pc, weeks ahead of schedule. France is at 95pc. The EU’s plan to ration gas by 15pc is coming into force and backed by sweeping emergency powers.
China is in a deep recession and has been reselling excess deliveries of LNG back onto the open market. Japan is firing up another seven mothballed nuclear reactors. Pakistan, India, Bangladesh, and Thailand have all slashed LNG demand, switching to coal where they can, or accepting blackouts where they cannot.
Bear in mind that Putin’s gas war has cut world supply by barely more than 3pc. This shock has been absorbed far and wide. Half of the loss has effectively been covered by demand destruction in the Far East and emerging Asia (65 billion cubic metres of cuts), according to the International Energy Agency’s Gas Market Update.
“I see the energy position improving rapidly. Maybe Truss will come to be known as Lucky Liz,” said Patrick Perret-Green from PPG Macro.
The war in Ukraine is turning further against Putin with every week that passes. The only way he can break out of this impasse is by a general mobilisation on a full war-footing, but to do that risks exposing the fissures of his regime.
This is not a stable equilibrium. The assumption made by those expecting exorbitant gas prices into 2024 and beyond is that this will remain a frozen and intractable conflict. My assumption is the exact opposite: either Putin seeks a settlement soon (if he can get one), in which case gas will soon be flowing again; or the denouement will go non-linear suddenly, akin to the abrupt collapse of the German army in March 1918, in which case the EU will quickly revive energy trade with a more amenable post-Putin government.
The Prime Minister’s energy plan is not ideal. An energy price cap of £2,500 is perhaps high enough to discourage waste, but the handout should not be extended to the affluent classes.
If the imperative is speed and simplicity – and yes, there is macroeconomic value in lopping 4pc off the headline inflation rate at a stroke – then it should be offset by a solidarity tax on high earnings and large properties....
Something had to be done to head off the pre-insurrectional hysteria of July and August. The package is no worse than variants in other European states, and marginally better than some. To call the emergency outlay reckless when we are at war with Putin is a confected critique by those who dislike this Government for other reasons.
In the meantime, the economic scare stories doing the rounds are greatly overblown. There is no run on the UK gilts market. Ten-year yields are 3.17pc in the UK and Canada, and 3.47pc in the US. Borrowing costs are lower in Europe – except Italy (4.05pc) – but that is because core inflation is lower. The discrepancy has nothing to do with creditworthiness.
Yields on German Bunds have also risen by over 100 basis points since early August in lockstep with the gilt surge.
There is no rupture of the pound either. Sterling has had a rough few weeks but the Bank of England’s trade-weighted index is still higher than it was after the referendum. The pound is roughly aligned with its average rate against the euro for the last six years. It has risen this year against the Japanese yen and Korean won. The salient story in the global exchange markets is the rise and rise of the over-mighty dollar.
The UK faces difficult times but it is not an economic crisis and it is not in worse shape than Europe. Nor does it have higher inflation, contrary to what we are led to believe. The August tally was 9.9pc in the UK and 10.1pc in the EU.
What we do face a cultural crisis: a trahison des clercs. The pathological catastrophism of the pro-Brussels commentariat is becoming a national cancer."
http://www.telegraph.co.uk/business/2022/09/20/talk-british-fiscal-crisis-vastly-overblown/
| 