Labour’s Truss scale shock: Bond hole with Germany at highest stage in 34-years: ALEX BRUMMER

Among Britain’s great advantages at present, vis a vis European competitors Germany and France, is political stability.

The election with a stonking majority for a Labour government promised much-needed calm after the Tory

turmoil and hope that bond yields, which help determine the cost of fixed-rate home loans, would recede from the peaks seen after Liz Truss’s disastrous mini-Budget.

It hasn’t been like that at all. One might have expected UK bond yields to move towards those in Germany, where the ratio of debt-to-national output is a creditable 63.5 per cent. 

The government in Germany has fallen and France is being governed by the most fragile of coalitions.

The economy which the Tories handed over to Keir Starmer was in rude health, with Britain forecast to be among the fastest-growing G7 economies this year and next, and inflation bang on target.

Blunders: Prime Minister Kier Starmer and Chancellor Rachel Reeves inherited an economy in rude health with Britain forecast to be among the fastest growing G7 economies this year

Instead, a chasm of 2.30 percentage points has opened between the yield on ten-year UK government bonds or gilts and that of German bunds.

The gap is at its highest level in 34 years and bigger than at the time of the Truss tantrum in 2023. At 4.5 per cent UK bond rates are way more than France and Italy.

Until recently the divergence could be partly explained by economic prospects with Germany and France heading for recession and stagnation respectively as Britain’s economy speeded up.

That no longer remotely is the case. In six months Labour, which came to power pledging change and growth, has shown itself to be economically inept. The promise by the Chancellor Rachel Reeves to ‘fix the foundations’ has proved a chimera.

The cost of living zipped up to 2.6 per cent in November, from 2.3 per cent the previous month.

This follows hard on the heels of data showing wage growth accelerated to 5.2 per cent from 4.9 per cent in the previous three months. 

The increase largely was driven by the private sector. The negative influence of Labour’s generous, productivity-free, public sector deals and a jump in the minimum wage cannot be discounted.

At a moment when central banks across the globe are cutting interest rates to stimulate output, the Bank of England is expected to hold rates at 4.75 per cent at today’s monetary policy committee meeting.

This is in contrast to the European Central Bank which trimmed short-term rates to 3 per cent last week and the US central bank, the Federal Reserve, which last night cut borrowing costs a quarter-of-a-percentage point to a 4.25 per cent-4.50 per cent range, its third successive move.

Caution on Threadneedle Street largely is driven by surging wage costs and the drift of inflation away from target. 

The decision by Rachel Reeves to collect £25billion extra from business, by raising employers’ national insurance, has been a calamity.

Because the money is being sprayed on the public sector, without efficiency targets, it does nothing to ease the borrowing and debt burden of government.

It does precisely the opposite. Many firms are raising prices to meet the cost. That, in turn, will make hitting the inflation target of 2 per cent harder, keeping interest rates higher for longer, adding to the cost of servicing the national debt.

Yet in a disingenuous comment yesterday the Chancellor continued to insist she hadn’t raised taxes on working people.

Not directly: but the national insurance rise has hit business and job prospects hard for working people, and pushed up the cost of filling shopping trolleys.

Just how nasty the shock to the nation’s economic prospects has proved is illustrated by the latest survey from the employers group the CBI.

The love affair with Labour looks over. It reports ‘business confidence has collapsed in the wake of the Budget, which has increased costs’ and led to investment cancellations. Manufacturing output has slumped at the fastest pace since mid-2020 – the peak year of the pandemic.

The right response of the Bank to a setback on this scale should be to cut interest rates boldly. There may a short-term bump in prices, but it is unlikely to last as demand subsides. The Bank claims its actions are driven by data.

The Old Lady needs to do Reeves, its former employee, a favour, to avert stagnation or worse.