Winter Is Coming For The UK

Authored by Bill Blain via MorningPorridge.com,

“Tell them the North remembers. Tell them Winter is Coming.”

The outlook for the UK looks increasingly grim. There are few reasons to hope a new government can reverse the mounting consumer fears, stagflation and the growing sense of decline.

Yesterday was cold, wet and grey. The sudden end of the glorious summer highlights how dark and bleak the mood in the UK has become. UK Consumer confidence has collapsed to levels not seen since the 1970s. London has ground to a halt with tube and rail strikes. Its not just the cost of living crisis – which, to be blunt, has only just begun and will get much, much worse as winter deepens– but folk are losing confidence in the broken mechanics of the economy, the absence of leadership and a growing sense things won’t get any better.

The country feels like its sinking into a treacle of energy-sucking, suffocating despond. Everything in Britain feels broken: the NHS is too crowded to treat patients, excess death rates show untreated cancers, heart-disease and stokes from lockdown now far outnumber Covid deaths, the police are so overloaded they have stopped even bothering to investigate crime, while airports are blocked, trains don’t work, and it really doesn’t matter because you can’t get a passport or driving licence renewed. As the rains come down, we’re under threat of dire authoritarian punishment if we dare use a garden hose – although to be fair, who is going to arrest you?

Thank heaven we’re about to get a new prime minister – SARCASM ALERT.

Do you really expect a bright Sun of Economic Hope to suddenly come up on Sept 5th? If so, go see a shrink – if you can get an appointment.

Liz Truss – nailed on as the winner and next Prime Minister- will be taking office early next month, and the expectations could not be lower. She’s being painted as lacklustre at best – and I fear that’s a severe overestimate, but please surprise me! I still have little idea what she stands for – but the folk backing her, and setting her narrative might. I have no clue what her secret sauce to reanimate the UK is. Thus far, all the noise of has been about playing to the 160,000 wealthy, elderly white Tory men who have the vote in the leadership contest, rather than the 60 million Brits she will notionally represent.

Her announced policies, like merging banking regulator, the PRA, into the FCA, are pointless tinkering at best. But it makes a point – her overriding concern in office will be ensuring others carry the can for the crisis, so first up against the wall will likely be Andrew Bailey, Governor of the Bank of England, and the Bank’s notional independence.

If what we remember about the great recession of 2022-2025 is it was Bailey’s fault – then the history books will need rewritten.

What the nation needs as we sink into the deepest recession in living memory is a Government of Talents – not a bunch of middling political hacks, or a fourth somewhat pointless Prime Minister in a row.

Maybe Liz Truss will surprise us – but it feels unlikely. Still, we live in hope. UK Politics will remain in thrall to Brexit (the dark, malign canker festering at the heart of the UK), which will continue to dominate the agenda and eat away the nation’s trade and export position – to engage with Europe to find a mutually beneficial compromise is utterly unacceptable to the TRG Taliban. Expect lots of union bashing for their temerity asking for pay rises as inflation remains stubbornly strong. Little will be done to reinvent, innovate and rebuild the broken institutions of State.

The core goals of the new government will be short-term survival and looking a little bit better than the opposition Labour party – because all that matters is winning the next election in just a few years time.

The next two years will not be a time of economic innovation. In Germany, the government recently slashed the price of rail travel, and it had an enormous positive effect in terms of long distance travel with multiplier effects from domestic tourism and work. In Germany a monthly railpass anywhere costs 9 Euros. In the UK it costs me nearly £100 every time I go to London.

I said it was bleak.

A fund manager asked me for my views on UK Bonds yesterday – my answer was relatively less bad than the outlook for UK stocks. At least with Gilts you are likely to get your money back  – albeit Sterling will probably be much, much lower. As for UK mid-caps and SMEs, which have been on a run, it’s likely the coming recession will see them suffer. Time to go defensive in UK stocks. The UK’s Virtuous Sovereign Trinity may be tested – the mechanism whereby the political stability and effectiveness of a nation, its bond market and currency form a strong tripod. If any leg breaks – then it spells deep, deep trouble.

But, not for me the misery of UK politics… last night I snuck off to Salcombe, the jewel of the Devon Riviera where I inadvertently came close to triggering a civil war. The greatest divide in UK society is the Cream Tea. Does the Jam go on top or the Clotted Cream, or the other way round? Cornwall and Devon have been in state of cold war over this critical distinction for decades. I did the Cornish thing – Cream on top of the Jam. It makes perfect sense. Devon folk were horrified. Jam goes on top of the crème in Devon. I had to pay a considerable forfeit, hence this morning I am struggling with a H2O/C2H5OH electrolyte imbalance. Ouch. If anyone ever offers you Devon Rum – run.

However, I did find myself sitting with some very interesting people. To dine with one economist could be considered a misfortune. To sit with two looks downright careless, but to sit with three  – well that’s asking for confusion.

3 economists – and at least 5 contradictory perspectives on where the UK economy is likely going, with myself throwing in some random distractions.

Surprisingly, the most right-wing inclined member of our informal brains trust was of the opinion the correct UK policy now is no intertest rate hikes at all – they are the wrong response to the wrong signals – but a massive economic stimulus to avoid a devastating and deep recession. “Ride inflation, because you can’t control it”, he said. Inflation has been triggered by an exogenous energy shock, but to try to cool the economy by inflicting monetary pain to stem demand will simply exacerbate real inflation in the form of wage demands and perceived shortages driving up prices – he also sagely noted how the big supermarkets have quietly withdrawn their cheapest economy brands, taking advantage of inflation to boost their margins.

The second economist took a very different view: speed is of the essence, the BOE has moved too slowly, policy mistakes make things worse, and now we need immediate austerity, tax neutrality, and interest hikes to swiftly re-balance the economy and impose control. Inflation must be brought down swiftly, or it will become entrenched, and have massive long-term consequences. Wages must be constrained – frankly the best way to calm inflation is an old-fashioned scare-the-bejesus out of workers sense of job security to undermine wage demands. She balanced her draconian measures with serious tax hikes on the uber-wealthy, proposing new property taxes on anyone with second homes or leaving the country to escape punitive taxation.

The third economist was looking at the long-term decline in UK productivity and wondering what policies are possible now to put the UK back on track for a prosperous economic future – but concluded we will remain in fight/flight mode with short-term fire-fighting on recession, wage inflation, consumer crisis and election cycles, means it’s all going to be about satisficing and short-term policies with damaging long-term consequences.

In short.. its messy out there..

Out of time, and have a great weekend..