Boris Johnson’s in trouble but the UK economy is fine for now

Britain certainly feels fragile at the moment with runaway inflation, war in Ukraine and all manner of local difficulties plaguing the UK body politic.

Already beset by scandals and electoral setbacks, Prime Minister Boris Johnson suffered even greater body blows on Tuesday with the resignation of  chancellor of the exchequer Rishi Sunak and health secretary Sajid Javid, key cabinet members.

The economy is another thing altogether, despite the dispiriting news about inflation and energy. The UK isn’t actually in that horrible a shape, what with £400bn of pandemic stimulus in circulation.

If the world tips into an energy shock recession, then this rainy, small crowded island nation ought to hold up better than most. With full employment, a strong banking sector and robust household and corporate balance sheets — and the ability, despite what the last chancellor said, to add more government fiscal stimulus — any downturn can be mitigated.

The UK’s debt-to-GDP ratio remains just below 100%, better than many other major economies, so there’s room to borrow. (Deeply indebted Italy is at more than 150%)

Sunak had already reached up several times into the magic money tree since detailing the budget in October. His successor, Nadhim Zahawi, will almost certainly do so again in any emergency budget to try to steady the ship. Whisper it, but there is plenty of flexibility available if political need arises. Tax cuts are coming and the UK government bond market can handle any extra supply within reason.

That potential fiscal splurge is hard to model into economic estimates, so be careful when listening to some of the more apocalyptic forecasts. The OECD,  referenced often of late, has a particularly poor track record in predicting UK growth. What matters is that the Bank of England has renewed confidence to continue its rate-hiking cycle to combat inflation. It is in a demonstrably better situation than the European Central Bank, which is still stuck on heavily negative interest rates. 

Probably the best forward UK growth indicators — the purchasing manager surveys — are still above the growth line, unlike many economies in Europe. Additionally, the City of London, a major source of earnings and tax revenue, has held up much better than feared. Even the FTSE100 has performed better than other major indexes.

This may all seem like tinkering at the edges, but the underlying economy is robust enough to withstand a lot of systemic shocks. The banking sector has been at pains — under the steely eye of the Prudential Regulation Authority — not to leave itself exposed to potential nonperforming loans. Let’s say banks are cautious but dancing: they remain confident handing out loans to companies as well as home mortgages. 

None of this means recession is off the table. Indeed, for many it feels like we are already in one. Economic growth has been flatlining in recent months and the cost-of-living crisis is very real for many. Inflation is almost certainly headed into double figures by autumn, but ought to stabilise later this year before turning down swiftly next year — unless Russia shuts off energy supply to Europe.

But there is a war chest, so to speak. UK household finances are healthy, in fact the best proportionally of all major economies with a near £200bn  of savings built up throughout the pandemic. That this stash has yet to be tapped into is evidently a sign of consumer trepidation, especially as house prices have been on an upward tear.

Normally in such a benign scenario, retail spending would be adding firmly to GDP growth. This negativity is feeding on itself but, at some point, it will reverse and lend a healthy kick upward to any recovery.

The most compelling strength of the UK economy is employment. A cost-of-living squeeze really does become a wider crisis with sharply rising unemployment. The herculean efforts of Sunak’s furlough employment scheme may seem long gone but it kept companies and employees afloat during lockdowns. Unemployment stands at just 3.8% with vacancies of 1.7-million. That is about as good as it gets.  

Understandably now there is a hangover effect as pandemic stimulus is gradually withdrawn, but the residual supportive effects should provide a buffer for some time to come — certainly government tax revenue is holding up nicely. It’s not peaches and cream by any stretch but all the main parts of the economy are in reasonable shape when you consider the whole world shut down and then dramatically restarted.

Sterling weakness has worsened the cost of importing commodities, priced  largely in dollars, but the pound is far from alone suffering from the hideous strength of the mighty greenback.

So chin up. Mustn’t grumble. We’re no worse off than the others. That is, as long as you avert your gaze from Westminster. 

Bloomberg