Boris Johnson is in trouble. But the UK economy is OK at the moment.


Britain is certainly feeling fragile right now with runaway inflation, the war in Ukraine and all sorts of local hardships plaguing the British body politic. Already plagued by various scandals and electoral setbacks, Prime Minister Boris Johnson suffered even greater blows to the body on Tuesday with the resignation of both Rishi Sunak, the Chancellor of the Exchequer, and Sajid Javid, the Secretary to Health, key members of the cabinet.

The economy is something else entirely, despite the discouraging news on inflation and energy. The UK isn’t really in such horrible shape, with £400bn ($480bn) of pandemic stimulus in circulation. If the world slides into an energy-shock recession, then this small, rainy, crowded island nation should hold up better than most. With full employment, a strong banking sector and strong balance sheets for households and businesses – and the ability, despite what the last chancellor has said, to add more government fiscal stimulus – any slowdown may be attenuated. The UK’s debt-to-gross domestic product ratio remains just below 100%, better than many other major economies, so there is room to borrow. (Highly indebted Italy is over 150%)

Sunak had already hit the magic money tree several times since he detailed the budget in October. His successor Nadhim Zahawi will almost certainly do so again in any emergency budget to try and stabilize the ship. Whisper it, but there’s plenty of flexibility available if the political need arises. The UK government bond market can handle any additional supply within reason: 10-year yields rose 4 basis points on the prospect of increased supply as Zahawi is widely expected to cut taxes, if politics gives him the opportunity.

Potential fiscal folly is difficult to model in economic estimates, so be careful when listening to some of the more doomsday predictions. The OECD, which has been frequently cited of late, has a particularly poor record of forecasting growth in the UK. What matters is that the Bank of England has regained the confidence to continue its rate hike cycle to fight inflation. It is clearly in a better position than the European Central Bank, which is still locked in deep negative interest rates.

The best predicted growth indicators in the UK – purchasing manager surveys – are probably still above the growth line, unlike many European economies. In addition, the City of London, a major source of revenue and tax revenue, held up much better than expected. Even the FTSE100 performed better than the other major indices.

This may all seem like tinkering around the edges, but the underlying economy is robust enough to withstand many systemic shocks. The banking sector has tried – under the steely eye of the Prudential Regulatory Authority – not to expose itself to possible non-performing loans. Let’s say the banks are cautious but dancing: they remain confident in granting business loans as well as mortgages.

None of this means the recession is off the table. Indeed, for many, it feels like we are already in one. Economic growth has stagnated in recent months and the cost of living crisis is very real for many. Inflation is almost certainly in double digits in the fall, but is expected to stabilize later this year before falling rapidly next time around – unless Russia cuts Europe’s energy supply.

But there is a war chest, so to speak: UK household finances are healthy, in fact the best proportionally of any major economy with almost £200bn of savings accumulated throughout the pandemic. The fact that this reserve has yet to be tapped is obviously a sign of consumer apprehension, especially as property prices have seen a tear to the upside. Normally, in such a benign scenario, retail spending would be a strong contributor to GDP growth. This negativity feeds on itself but, at some point, it will reverse and provide a healthy boost to any recovery.

The most compelling force in the UK economy is employment. A cost-of-living squeeze really becomes a larger crisis with a sharp rise in unemployment. The Herculean efforts of Sunak’s furloughed employment program may seem long gone, but it has kept businesses and employees afloat during the shutdowns. Unemployment stands at just 3.8% with 1.7 million vacancies. That’s about as good as it gets.

Naturally, there is now a hangover effect as the pandemic stimulus is gradually withdrawn, but the residual support effects should provide a buffer for some time – government tax revenues are holding up well. It’s no peaches and cream, far from it, but all major parts of the economy are in reasonable shape considering that the whole world shut down and then restarted dramatically. The weak pound has exacerbated the cost of commodity imports, the price of which is largely denominated in dollars, but the pound is far from alone in suffering from the hideous strength of the mighty greenback.

So hang in there. Do not growl. We are not worse off than the others. That is, as long as you take your eyes off Westminster.

More from this writer and others on Bloomberg Opinion:

Rishi Sunak’s helicopter drop makes life easier for the Bank of England: Marcus Ashworth

Have Britain’s Conservatives been in power too long? : Martin Ivens

Power-in-Waiting Portraits: Who’s Next After Boris Johnson: Adrian Wooldridge

(Updated 3rd paragraph with UK 10-year government bond yield data.)

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Market Strategist for Haitong Securities in London.

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