August 19, 2022

Weak Economic Data Belies British Optimism

“The British economy is recovering,” Mr. Osborne said to a room full of London’s financial elite. “Half a million new private sector jobs have been created and our budget deficit is now falling from its record highs. Stability has returned.”

The chancellor’s state of the economy speech is an occasion of politesse and ritual held annually at the 18th-century residence of the lord mayor of the city of London. The guardian of the British economy sets out the government’s financial strategy, and bankers and fund managers, who are now largely responsible for financing Britain’s swollen budget deficit, tend not to disagree.

As the weaker economies in the euro zone have flirted with bankruptcy, British bonds have performed well, acting as a haven of sorts despite the fact that the budget deficit, at 10 percent of gross domestic product, is about the level of Greece’s.

That Britain is not in the euro zone and can depreciate its currency to increase exports has been a crucial contributor to investor confidence. Perhaps even more so, however, has been the public campaign waged by Mr. Osborne to persuade voters and bondholders alike that Britain can return to the path for long-term growth only by cutting government spending.

But as growth numbers continue to disappoint, Mr. Osborne’s job is becoming more of a challenge.

On Wednesday, data released by the government revealed that the number of people seeking unemployment benefits jumped by 19,600 in May compared with the month before, a two-year high that reflects the continuing reluctance of employers to hire as growth stagnates.

Not all was bad in the report. The unemployment rate held steady at 7.7 percent, as Mr. Osborne pointed out Wednesday night. But the increase in the number of job seekers, together with signs that wages were not expanding, is the latest evidence that the economy is stuck in a rut.

The Organization for Economic Cooperation and Development, a multinational research group based in Paris, recently lowered its forecast for British economic growth to 1.4 percent for this year. Even the International Monetary Fund is projecting a sickly rate of 1.5 percent. These projections, along with many by investment banks in London, are lower than the government’s official forecast of 1.7 percent for this year.

“Mathematically, I just do not see where growth is going to come from,” said Tim Morgan, head of research at Tullett Prebon, a brokerage firm here. He said that past sources of growth, like real estate, construction, health and education spending and financial services, were showing no sign of recovery.

As a result, he contended, Britain was unlikely to grow by more than 1.5 percent a year in the near future. “And without growth, there is no tax revenue,” he said. “Debt and deficits rise, as does the cost of servicing Britain’s debt, and you then come to a point when the credit agencies begin to look at a downgrade.”

For an economy that is dependent on the public markets, and on foreign investors in particular, to finance its borrowing, such a possibility would represent a Greece-style disaster.

In his speech on Wednesday, Mr. Osborne touched on this concern. He said that the economy continued to face stiff challenges, and that the stagnant banking sector was hampering growth. “Our banking system fueled the boom,” he said, “Now it is slowing the recovery from the bust.”

Mr. Osborne endorsed proposals that would require banks to hold more capital and partly shield consumer operations from investment banking. The proposals, which would most likely increase operating costs for banks, were initially made in an interim report by the government-backed Independent Commission on Banking in April.

Mr. Osborne’s backing makes it more likely that the rules, which include a so-called ring-fencing of consumer deposits from potential losses at investment banking operations, would be made law. That would put Britain ahead of the United States in pushing through changes to separate more clearly the traditional deposit-taking services from the riskier but more lucrative trading operations.

Mr. Morgan’s more alarmist views about the economy are not widely held at this point. With bond yields at 3.2 percent, comfortably below those of the weaker European economies, such a crisis, if it comes at all, is by no means imminent.

All the same, Mr. Morgan is not alone in warning that the battle to reduce Britain’s debt and deficits is hitting a wall. Morgan Stanley, in a more restrained report, said that the government’s growth forecasts were optimistic. It also pointed out that the real level of debt, at about 70 percent of gross domestic product, may be understated owing to another trillion pounds worth of unfunded pension liabilities. Funds backing Britain’s bailed-out banks are also not included in official figures.

For now, however, investors seem inclined to give Mr. Osborne and the government the benefit of the doubt.

In his speech on Wednesday night, Mr. Osborne emphasized how, in a world of declining debt ratings, Britain still maintained its AAA rating.

“We have a deficit larger than Portugal, but virtually the same interest rates as Germany,” he said. But if growth continues to disappoint, that may no longer be the case.

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