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On 13 January 2025, the spread between 10-year gilts and German Bunds reached 230 basis points. This was four points higher than the peak reached on 27 September 2022 when Lees Truss was Prime Minister. The UK is probably not heading for a credit crisis. But his position is weak. The government needs to strengthen its faith in the UK’s sanity and its own good sense.
Interest rates rose in the G7. Even in Germany, the yield on the longest 30-year bund rose by 290 basis points between 15 January 2021 and 15 January 2025. Alas, UK output growth was the highest in the G7 at 440 basis points. In mid-January, the UK yield on 30-year gilts was at 5.2%. This was the highest level in the G7, German products were 2.8 percent and French products were still only 3.9 percent. But US output at 4.9 per cent was not far behind the UK level, perhaps due to the huge structural fiscal deficit in the world’s economic superpowers.
In total, the UK’s long-term debt yields have risen more than peer countries and are at higher levels. Yields on 30-year gilts were 56 basis points higher than in Italy on January 15. Also, while UK yields rose 78 basis points last year, Italy’s did not. That’s a shame.
A critical question is why rates have increased. The biggest change came in real interest rates, not inflation. In the case of the UK, we have reasonably strong measures of both index-linked and conventional gilts production. The difference between the two reflects inflation expectations and inflation risk perception.
These data show that real interest rates in the UK have risen from a trough of -3.4% in early December 2021 to a peak of 1.3% on 14 January 2025. The jump in real interest rates is mainly related to the increase in the yield of ordinary gilts, which suggests that the change in inflation expectations is surprisingly small.
So, what do these real and nominal yields tell us about the stability of UK public debt? If the debt-to-GDP ratio is to stabilize, when the real interest rate exceeds the rate of economic growth, the government must run a primary fiscal surplus (the balance between revenue and expenditure before interest payments). A real rate of 1.3 percent would allow for a modest primary deficit if growth is consistently high. IMF data In the year It shows that UK growth trends between 2007 and 2024 have been fairly steady. Therefore, debt stability requires a consistent primary balance. With pleasure, basis Office of Fiscal ResponsibilityThe October budget analysis predicts that the primary budget will move to a surplus of slightly less than 1 percent of GDP in the last three years of this decade. This would be consistent with a stable net debt-to-GDP ratio, according to the OBR’s debt forecast.
The implication is that the condition is treatable. However, there are risks. One is that global real and nominal interest rates could rise further, perhaps due to a further jump in investment or defense spending or increased awareness of political, monetary and financial risks. A particular weakness of the UK is that the country has run a persistent capital account surplus, which, unlike Japan, makes it dependent on foreign currency. This is also true for America. But the latter is the main debtor to the rest of the world.
Another concern for the UK is that GDP growth, which is already low, could fall further. The politics of running a primary budget surplus may be impossible. Another risk is that the net debt to GDP ratio is already close to 100 percent. This is hardly low. Comfortably, it is below the level in Japan, Italy, France and the US. But it is far more than it was two decades ago. Finally, there is the “Trump threat”, especially threats of high tariffs on the non-open economies of the EU.
In short, England’s situation is weak. The government must maintain the confidence of the creditors. It is very important not to adopt policies that cast doubt on his good sense. He did the same with how taxes were increased in the budget. Therefore, make regulatory advances, especially in the labor market. The government should strengthen its position current cost Take into account the upcoming assessment or higher taxes.
The UK should focus on recovery and growth. Panic is unnecessary, but the era of cheap borrowing is over. Policy must respond.
