'Bad vibes' about the UK economy brings new concerns for Rachel Reeves

Read time: 3 minutes

In brief:

• The UK economy is showing concerning signs, with the pound falling to a 14-month low against the dollar and government borrowing costs reaching their highest level since 2008's financial crisis.
• Ed Conway, Sky News' data and economics editor, attributes this to a gradual decline in investor sentiment towards the UK.
• Rachel Reeves faces a difficult position with her fiscal rules - she has promised no tax rises and no cuts to public spending, but The News Agents say one of these promises may need to be broken.

What’s the story?

Rachel Reeves is facing mounting pressure this week as the pound falls to a 14-month low against the US dollar.

While the economic climate doesn’t feel quite as disastrous as it did at the time of the 2022 mini-budget, experts are warning that in the last 48 hours things are feeling particularly unnerving.

This is because, while there was a clear trigger what caused the economy to crash in 2022, there’s nothing to attribute the UK’s struggling economy to today, just a “slow accretion of just bad opinions and bad vibes about the UK,” Ed Conway, Sky News' data and economics editor, explains on The News Agents.

UK borrowing costs surged again on Thursday morning - with the cost of 10-year government borrowing hitting the highest level since the global financial crisis in 2008.

“UK investors, or investors who invest in UK assets, including UK government bonds, are moving with their feet and saying the UK has got a long term problem, and we are going to charge you more for the UK Government to borrow,” Lewis Goodall explains.

“This, to some extent, mirrors problems that other countries are seeing. France has seen it, the US has seen it but it's certainly true to say that there feels as if there is an increasing sense of malaise and even gloom about the UK economy.”

The news threatens the chancellor’s chances of meeting her self-imposed fiscal rules.

However, a treasury spokesperson said Reeves has an “iron grip” on public finances, adding: “No one should be under any doubt that meeting the fiscal rules is non-negotiable.”

Why is this happening?

When the markets crashed under Liz Truss in 2022, it was obvious that her mini-budget was the cause - although, she, of course, would deny that.

So much so, that the former Prime Minister sent a cease and desist letter to Keir Starmer over his ‘defamatory’ claim that she ‘crashed the economy.’

But today, there’s no specific news event triggering the volatility; it seems to be a gradual decline in investor sentiment towards the UK.

It’s just a matter of “bad vibes about the UK,” Ed Conway explains.

“When the pound starts to move quickly, usually there's some news that's triggering it.

“But what's slightly unnerving about this is it's not like there is a moment. It's not like we've had a budget. It's not like there's been any economic data. It's not even like Donald Trump has suddenly changed his position vis-a-vis the UK, which has prompted this.”

There has, as Conway mentions, just been a general mood-shift towards the UK markets. He attributes this to investors still being conscious of the position the UK found itself in in 2022, which he describes as on the “precipice”.

If something is going bad within financial markets, and investors are looking at who to sell off first, the UK “is at the front of the queue,” he says.

“What we're seeing here is just a general skittishness about the UK,” Lewis adds.

Will Rachel Reeves change the fiscal rules?

Without a clear diagnosis, there is also no clear solution for how Rachel Reeves and the Labour government can reverse what’s happening.

“Back in 2022 it was obvious what you had to do,” Conway says.

“You sack Kwasi Kwarteng, you bring in Jeremy Hunt. Eventually, if you're Liz Truss, you resign.

“That was what eventually calmed down markets. This time, it's not so obvious what you do if you're Rachel Reeves. There's no easy button to press, because, like I say, it's just vibes.”

Reeves is somewhat trapped by her self-imposed fiscal rules.

She has promised no more tax rises and she’s promised not to cut public spending - doing so would be “the last thing the country needs,” Emily Maitlis says.

But, she adds; “one of those is going to have to go.”

“Every noise that we have coming out of Whitehall is that she keeps the fiscal rules, she cuts spending and she doesn't raise taxes,” Conway says.

But, cutting spending is not a good position to be in.

“If it's your first budget, and it ends in you not being able to keep your promises from it, it's not a great start.”

Listen to the latest episode of The News Agents.