The UK macroeconomics has been one of the big stories of the past two weeks, so you might think this blog post should explain it before. But my speculation at the time was that media coverage was like a nervous flyer, and when the plane hit a bit with the normal turbulence it crashed and everyone was going to die. I’m not a journalist, so it seemed better to wait a week to see if I was right.
I’m happy that I did it. This is what really excited the media and what happened next
The UK’s 10-year government debt has increased from about 4.6% to about 4.9% over the week since around January 6th. However, interest rates then increased to around 4.65%, which quickly fell.
Was this a UK or global blip? We ask that you need to see our fees and answer.
Something very similar is seen, but the amplitude is slightly smaller. This shows that what we saw in early January was primarily global long-term interest rate movements, with certain UK icings that were largely gone when the latest UK inflation data was released, are a little above.
I’ll go as to why this happened so quickly. But why did the entire British media make all this wrong? The main lesson here is that if the data is unstable and you treat all the short-term movements up and down as permanent, or even worse, the beginning of a trend, you can lay many eggs on your face. This is a lesson that all economists know, but journalists are increasingly paid to forget. But that’s not the only reason journalists were excited a week or two ago.
The other is a truss financial event. Conservative politicians, and their tailored journalists, are eager to see workers suffer from something comparable to what happened to conservatives under Liz Truss’s leadership. So, whenever they see a puff of smoke it makes them want to scream fire, even when that smoke appears to come primarily from a long way! Other journalists then made them feel like they had to cover the same story, and political journalists put a British political spin because that’s what they’re doing.
When journalists cover things related to fiscal policy, we know from a long experience that the language and reasoning they use can be very different from the macroeconomics taught in universities. I call it Mediamacro. For example, it involves treating the government as if it were a home.
Deficits as a sign of political irresponsibilityand Personification of financial markets as a god of vengeance. As is often the case, it’s much better to read a good academic economist. Like Jonathan Port heremore than most journalists write.
The end result of uninformed overreactions and distorted reports was that many people were seriously misunderstood, and that the media earned a crisis in almost nothing. If you forgot, just a week ago The newspaper speculated That Reeves was about to be fired for anyone who might replace her due to a global move, which was largely the interest rate she had not affected. I used the word melodrama in the title of this post, but I could have used madness equally.
What causes the upward blip of long-term interest rates around the world? To be honest, who knows and who cares? When I was much younger, I was closer to moving on to a much better paying job working in town, and I said no because I thought that worrying about such things would soon cause tears. I found true macroeconomics more interesting and still so. Unlike me, if you are interested in short-term bond market fluctuations, then hIt’s Toby Nanguru See the evidence we have, and This is what Paul Krugman speculates That could all be about Trump. As a result of Trump becoming Potus, the degree of macropolicy uncertainty has shifted sharply, and this must certainly be true that it is likely that long-term interest rate movements will become more unstable.
What about the exchange rate? Sterling depreciated in January, but that hasn’t reversed. The movement is small So, it’s not at all unusual, so unless you speculate about currency movements, you’re not interested here.
This entire episode raised two other issues worth discussing.
Financial vulnerability
Because Reeves, like his former prime minister, promises to follow the golden rules. It should be that day-to-day (current) expenditures are paid out of taxes over the medium term. As a result, what appears to increase spending over the medium term leads to speculation as to whether it will be reduced to compensate for other spending items or whether taxes will have to rise. Higher long-term interest rates result in higher spending that will help government debt.
The most important point here is to ignore many of the things you read and hear in the media once again. First, there is absolutely no need to cut spending in the short term, as it is a financial rule that Reeves promises to consider the expected balance between spending and taxes in a few years. Secondly, this kind of thing happens constantly because there are all sorts of macroeconomic developments that can affect the current government deficit in a few years. As a result, as this episode clearly shows, it is generally better to wait and watch rather than react immediately. Third, there is no reason why higher spending in one sector must be met with reduced spending elsewhere. You can also fill it with higher taxes. There is no macroeconomic justification that the media tended to talk about spending cuts rather than higher taxes.
So Reeves was absolutely right to ignore all media hysteria. However, I have to say that Reeves has made two mistakes before. First, financial rules that balance current spending with taxes applied to forecasts five years ahead are for good reason. She changed this on the budget, so it will eventually apply just three years away. It was simply a bad thing decision. After the budget, Reeves made the mistake of appearing to rule out any significant future tax increases.
Many people respond to talking about spending cuts by blaming this particular fiscal rule, but in my opinion it’s wrong. As long as Golden Rules appear to be ahead of the board, the short-term volatility caused by expenditure and tax fluctuations is likely to be reflected in volatile economic reports rather than volatile economic policies, and it is a mistake to combine the two. I put the case down For the golden rules as financial rules here.
Short-term economic growth
The second lesson was about data on economic growth, which was frequently mentioned in reports. However, the lesson that monthly or quarterly growth numbers are also volatile, so the short-term fluctuations in the bond market also apply to growth numbers. Conservatives now boast about achieving economic growth in the G7, but this is a meaningless claim, as it is based on a specific quarterly growth rate.
Similarly, increasing underlying growth can usually involve significant delays in any impact policy. What the new labour government has done will have little impact on the current reported growth numbers (i.e. end of 2024). If policy is related to recent growth, it is the last government policy.
To take just one example, you’ll read a lot about how employers hate budget-imposed NIC hikes. Below is an evaluation of the OBR on this impact on GDP, along with the impact of a small increase in public investment announced at the time.
They estimate that employers’ NICs will be high if they lower GDP levels by 0.1% in fiscal year 2026/7. Less than half of that will occur next year. These estimates are relatively uncertain, but few are much larger or faster. It’s easy for journalists to link their October budget to recent growth data, but this doesn’t really mean there’s absolutely no causality.
What this chart shows is that unless this impact is offset by more restrictive monetary policy, fiscal policy could increase demand and therefore grow in the short term. We are in a stronger position in quantifying these effects. The final budget is expanding and should increase GDP growth by around 0.5% in 2025/6. As long as labor is “kickstart growth,” this is it, but don’t expect to start looking at it with data for at least six months.
Monthly or quarterly changes in economic growth are not very interesting, but the long-term growth and the impact of labor government on it is worth discussing. Not Mediamacro Melodrama, these questions are subjects that I hope to return quite quickly.
