If Britain is hurtling towards a sterling crash, nobody has told the global currency markets.
The pound is today trading at the top of its post-Brexit referendum range against the euro near €1.20. It is massively overvalued against the Japanese yen. The sterling trade-weighted index is near a nine-year peak.
And if this country is insolvent and heading into the arms of the International Monetary Fund – an article of faith on the British political Right – nobody has told the debt markets either.
Credit default swaps (CDS), which measure bankruptcy risk on five-year UK debt, are a well-behaved 23 points, lower than for the US (31), France (35), Canada (40), China (55), Italy (56), Saudi Arabia (62) and Brazil (171).
Few countries are lower. These contracts strip out inflation risk, and therefore offer a quick and dirty insight into residual default risk.
The sophisticated view among hedge funds and global wealth managers is that the British economy is gradually recovering from a string of shocks – Covid, Putin’s gas squeeze, disentangling itself from the barbed wire of Brussels – and may prove to be an outperformer in the late 2020s.
The UK is more open than Europe to disruptive tech and artificial intelligence, despite much exhilarating talk from Emmanuel Macron in Paris this week. The UK is less prone to erecting regulatory and trade barriers at the slightest excuse, and is therefore likely to see a faster spurt of catch-up productivity growth.
The notion that Britain may soon need an IMF bailout akin to the sterling crisis in 1976 plays fast and loose with historical context. “It is nonsense,” said Dario Perkins, global strategist at TS Lombard.
Denis Healey was borrowing in dollars, which the Bank of England cannot print, in order to defend an indefensible exchange rate. The post-war model was disintegrating. Class war had reached fever pitch. The fiscal deficit was 10pc of GDP and inflation had just peaked at 27pc. Opec petrostates were pulling their money out of London.
“In 1976 we hit a complete crisis point. The politics were broken, the economy was broken, the UK was still hanging on to being a reserve currency,” Perkins said.
“None of that is happening today. We have a flexible exchange rate. We’re not going to have a sudden tipping point and a balance of payments crisis: we’re in a totally different world.”
Nor is this anything like the ERM crisis in 1992, when the Bank of England had to raise rates to 15pc during a deepening recession and a property crash, in order to defend sterling against the D-Mark just as the Bundesbank was on the war path over Germany’s reunification boom. Cardinal lesson: never subcontract your monetary policy to another country by pegging your currency.
This is not to forgive Labour for its awful first Budget. Slumpflation fears set off genuinely alarming moves on the markets a few weeks ago, chiefly because global investors felt duped. Strenuous efforts to soothe them ever since – and a recognition that global capital stays only where it is loved – have mended the rift.
Yields on 10-year UK bonds have dropped half a percentage point from their peak and are no longer trading at a penalty over US treasuries. Nor are they now out of alignment with the eurozone core, which “enjoys” lower structural yields only because it is a dead zone in the grip of Japanification.
The latest data on foreign direct investment from UN Trade and Development (Unctad) show that the UK was a star performer last year, capturing a 32pc rise in greenfield projects to $85bn (£69bn). Europe saw a 45pc drop in total FDI, with falls of 60pc in Germany and Poland.
The UK’s top project was Blackstone’s £10bn plan to build Europe’s biggest hyperscaler at Blyth, on the Northumberland coast. Data centres are now deemed “critical national infrastructure”, making it easier to bulldoze through planning obstructionism. The campus – Project Wind – will be powered mostly by North Sea wind turbines.
Blackstone is a hard-nosed $1.1 trillion US asset manager. It would not spend £10bn on an electricity-devouring data centre if it believed scare stories about a coming British power crisis. It is betting on the opposite outcome.
As a Conservative, my advice to the Tories is to stop wasting political capital railing against clean tech because a) it makes you look economically primitive, and b) it will come back to bite you in four years. There are genuine reasons to attack Labour, not least its levelling-down assault on British schools.
From my angle covering the world economy, the UK looks better than it does when seen from the inside. Most of the globe is in some sort of trouble. Bond and currency markets are ultimately a contest of the least ugly.
Lord Agnew, a Tory ex-Treasury minister, portrays Britain as a particular basket case, on “suicide watch”, borrowing and squandering as if there were no tomorrow.
I agree that the UK has long been living beyond its means, relying on foreign capital to cover trade and fiscal twin deficits. It has racked up a net international investment position of minus £837bn – though the US worries me more, at minus $23.6 trillion.
Nevertheless, I think our bad predicament is getting better rather than worse.
The UK’s current account deficit was 6.2pc of GDP in early 2016, evidence of insidious macroeconomic imbalances under EU membership, but also of depleting North Sea oil and gas reserves.
The structural deficit has since closed to 2.8pc. The big beast in the remaining gap is energy, biting again this week as gas prices spike to a two-year high.
But energy imports are on a descending path as electric cars and hybrids displace petrol vehicles, renewables displace gas in power plants, and heat pumps displace gas boilers in homes. The UK will eventually become a large exporter of offshore wind to Europe, regaining the position it once had as a regional energy powerhouse.
The National Institute of Economic and Social Research says the UK needs sustained public investment of 4-5pc of GDP per year to escape decline and catalyse a hi-tech economy.
Labour talked big before the election but then spent most of its £142bn in extra borrowing this parliament on pay deals for its friends. Net public investment will be just 2.4pc of GDP by 2029, better than recent history, but still below the G7 average.
It is hard to be giddy with enthusiasm but the UK has other strengths, thankfully, and the curse of paralysing Nimbyism has been lifted. The Bank of England is cutting rates. Less fiscal drag is coming from austerity.
This year may not be as bad as many fear.
If there is a major threat to the UK’s long-term prospects it comes chiefly from the un-British and feral character of our current political discourse.
We gracelessly hounded Rishi Sunak from office for sins that most cannot remember, and there seems to be a pathological urge to do much the same to Sir Keir Starmer.
We all need to lay off social media for Lent and calm down.
Stop moaning – the economy is in better shape than it looks
Labour’s Budget was terrible – but we have more to fear from pathological doom-mongering