As of September 6^th, the UK has a new prime minister, in Liz Truss, and a new chancellor in Kwasi Kwarteng. To say they face immense challenges is no exaggeration. Then again, challenges abound across Europe, MENA and no less in the United States. Against such a chilling backdrop, do we not face the threat that economic problems building within the UK are exacerbated by economic troubles beyond it? Indeed, only an ‘economic fool’ would deny the risk those of us in the West ‘go down’ all the faster because we have spent decades shackling ourselves together economically and financially.

With all these clouds darkening over the UK, let me reflect on forces that just might shed some sunlight. For one, the reshoring of manufacturing to the UK is underway. This is being propelled, not merely because the pound sits competitively comfortably where it lowly does, but because of efforts at bolstering supply security. Here is another ray of sunshine. However much Truss tries to go cold on the Chinese state, its rapidly growing ‘affluent’ class can only continue warming to all things British. And be in no doubt whatever challenges China faces, Beijing has the monetary and fiscal firepower to effectively fix things. Less we forget, India too is growing its affluent class, albeit not as impressively as its neighbour. More widely, the world is not short of economies which are not merely enjoying growth, but nations which the UK enjoys close commercial connections thanks to a commonwealth.

We have also to consider some positive fall-out from the economic and political shocks that are certain to hit continental Europe. The fall-out I write of is the return of not only many of those hundreds of thousands of EU nationals who evacuated the UK when coronavirus struck, but some British ex-pats too, possibly many. Remember, virtually all of these have settlement status here. The reality is, in being so focused on our problems, we miss the fact that living costs and interest rates are moving sharply higher across large tracts of Europe. Indeed, the escalation in pay awards being seen in the UK which some claim will result in a hysterical form of wage-price leapfrog will all the more draw those formally here to returnand indeed encourage those here who stepped out of the labour market to become economically active again, filling record-breaking vacancies.

Consideration must also be given to the fact that for all the cost hikes hitting UK households, throughout the coronavirus period – in aggregate – these were flooded with cash. This is not to be insensitive to the medical crisis which struck the UK, but merely to point to facts provided by the Bank of England; facts which that institution have chosen to ignore in its dire economic forecasting.

What of the cost shocks hitting UK manufacturers? Of these, the rise in worker pay must be viewed as a long delayed and welcome re-pricing of manual labour. The increased pay awards we are seeing – and coming, because managements are desperate to recruit and retain – will this time next year be coming through as rising real wages. As for sharply higher energy costs, we need to understand the UK is a world away from the economy it was; an economy once filled with unionised heavy industries, largely commoditised manufacturing, and uncompetitive products. Just as the new Government will borrow to fund a widespread fiscal programme to ‘help households’, it will do the same with businesses. 

Remember that back in 1979, the new Government came in with a policy to kill inflation based on both monetary and fiscal asphyxiation. This time around we must be conscious that the new team in Downing Street has adopted an extremely loose fiscal stance. We are set for the loosest fiscal policy since Nigel Lawson’s budgets from 1984 through to 1988 – the last of which was, of course, ruined by the timing gap between announcing the end to MIRAS and its actual end. As for the fears that the end of ‘help-to-buy’ will propel the UK housing market into a downturn similar to that of 1989, my response is that the UK residential market is so much more fundamentally robust now than it was then.

Now, while moves higher in the base rate, and along the yield curve more generally, will tighten monetary conditions, a weaker pound will in part counter this. As for those mortgaged homeowners being sorely hit by higher interest rates, this impact has and will continue to be part-absorbed by the prevalence of five-year fixed-rate deals, and 14 years where an ultra-low base rate allowed for the fastest deleveraging in the history of UK home ownership (with 8.8 million homes owned outright in England, and the 6.8 million with a mortgage never having been leveraged at a lower average LTV). Remember too, that mortgage deals post-2008 have in most cases been offered at a 75% LTV and stress-tested to a 4% base rate. 

Do not also forget the slashing in the base rate when coronavirus struck and the reduction in stamp duty. Remember too, that just as real wages will this time next year be rising, the real interest rate will be if not negative, not far away and certainly far from punitive. The reality is that, to fully assess the future for the UK economy, we need to allow not only for the monetary drags that weigh on it, but the fiscal and monetary bounty it enjoyed when a great many were put on a paid sabbatical and had their living costs markedly reduced as they were furloughed or worked from home.

Another positive development which will help cushion UK mortgaged homeowners and those seeking to become as such from the rise in the base rate, will be the growth in challenger lenders. For just as the UK grocery market and other sectors have seen the arrival of disrupters, so will the market for mortgages. 

As for concerns over what damage a disorderly sell-off in gilts and sterling could inflict on the UK economy, my reply is this: while the dollar may be flying now, it and the US Treasury market have a hard landing coming. And when these crashes happen, sterling and gilts will not be co-casualties, but beneficiaries.

As for political uncertainty, the Fixed-term Parliaments Act ensures the present Government can delay the next General Election until January 2025. As for calls for IndyRef2, one can be sure these will fall on deaf ears in Westminster. In fact, one can be confident that the SNP/Green collation in Holyrood will face growing electoral headwinds, because it will continue to insist that wind farms are the only new energy option. In terms of the Northern Ireland Protocol and the risk it gets torn up and triggers a trade war, the simple truth is that neither the UK nor EU want to layer on a new economic problem to those they already face.

So, while we can compare 2022 to 1979 and 1989 as much we like, the UK economy is nothing like it was back when recessions struck in those years. The world too is much different. Back in 1979 and indeed 1989, the global economy was essentially formed of Western Europe, the US and Japan. Now we can justifiably use the adjective ‘global’. And as much as we pour scorn on the ‘poor UK economy’, be in no doubt that nations enjoying growing wealth want to pour some of it our way and ‘some’ of a great many is a lot. Let us not forget that the UK economy was the fastest growing among peers just last year, and moreover we have no doubt forecasts for the years ahead from the IMF, the BoE and many others will, in time, prove deeply misguided.