CGTN Europe spoke to Jane Foley, Head of FX Strategy at Rabobank.
Category
🎵
MusicTranscript
00:00Let's talk to Jane Foley, Head of Foreign Exchange Strategy at Rabobank.
00:03Jane, good to see you. Our UK Finance Minister, Rachel Reeves, being told to stop her imminent
00:08flight to China, stay at home in the UK, steady the ship. Her political opponents,
00:13of course, would say that, wouldn't they? But how serious is this?
00:17Well, we do have signs that the gilt market and the sterling have settled down today in
00:23the European session, but there's no doubt that both assets, the gilt market and UK sterling,
00:29do remain really quite vulnerable. And I think what we've been seeing
00:34in a very rapid way yesterday, but I think really over the last few weeks, is a repricing
00:40of these assets towards a new reality, really, for the UK. So if you go back, for instance,
00:46to the first half of last year, growth for the UK in the first two quarters of last year was coming
00:52much better than expected. There was optimism about the post-election government in the UK.
01:00We had the manifesto that was promising us from the Labour Party that we would see higher growth
01:08and that we would see more investment. And instead, actually, we saw a downward revision
01:13before the end of last year of Q3 GDP, which saw no growth in that quarter. So a much more
01:19pessimistic outlook has been forming, really, for the UK economy. Some commentators talking
01:25about stagnation, even stagflation. And it's against that background that the market realises
01:32that the budget or the Chancellor's budget has very little wiggle room and that might mean more
01:37taxes, which could slow growth even more. So the market's adjusting, really, to a nastier
01:44reality for the UK than the one perhaps they had been hoping for, say, in the middle of last year.
01:50The government's insisting it will not borrow more to fund day-to-day spending. Really? Is that
01:57realistic? Are they going to be able to stick to that? Well, there's certainly pressure for
02:02the government to really clarify this position. Now, I think one thing that is important for the
02:07credibility of the government is that it sticks to its own fiscal rules. However, if it does
02:13stick to those fiscal rules, well, that probably does mean a good chance that we'll either see more
02:18austerity being announced or more tax rises. Again, neither of those are going to do anything
02:25to help the growth outlook, which is already faltering. So there is no easy way out of this
02:30situation, and that's the reality that the asset prices are adjusting to right now.
02:35Some economists, old people like me, are comparing what's happening now to 1976, when the pound fell
02:43so far the UK had to get a bailout from the International Monetary Fund. Are we there yet,
02:49or is that still a long way away? We're not there yet, but that doesn't mean to say that debt
02:56isn't an issue for the UK. I mean, it certainly is. The debt as a percentage of GDP in the UK
03:02is just below 100 percent. It's about 95.5 percent. Now, to give that some perspective,
03:07if we go back to the global financial crisis just before the global financial crisis, it was around
03:1250 percent, around that sort of mark. So we more or less doubled it in a relatively short space of
03:17time. Various reasons for that, of course, and many other countries in a similar boat post-COVID
03:24as well. So this isn't just a problem that the UK is finding. Now, we do have more credibility
03:30in the government. We do have a tighter labor market. There's lots to be said in terms of
03:36how far the UK economy has come relative to the 1970s. But that doesn't mean to say we don't have
03:42our problems. And certainly, it does look likely that for many of us, we'll be facing a pretty
03:49heavy tax burden in the next few years as the government hopefully makes structural reforms
03:57to put investment high up in the agenda and more growth and wealth and prosperity over the longer
04:04term. Jane, thank you for that. Jane Foley, Head of Foreign Exchange Strategy at Rabobank.