At roughly $3 trillion, the UK economy is large and contains multitudes. Not as massive as it might have been as a result of Brexit, Covid-19 and Russia’s invasion of Ukraine, but enough to rank sixth in the world.
As such, there is no one indicator that will tell you everything you need to know about it. We’re sometimes not even aware we’re in a recession until we’re out of it, or that we never entered it at all (see: the double-dip recession that never was).
Still, there’s one data point that is sure to set the heart racing a little faster amongst policymakers in Whitehall and Threadneedle Street as well as traders and bankers: the inverted yield curve. Not to be confused with inverted fullbacks, something Pep Guardiola does to lose knock-out matches to teams not backed by sovereign wealth funds.
At 5.25 per cent, two-year gilts are now nearly one percentage point higher than 10-year yields. This is the opposite of what one would expect in normal times, when investors demand higher returns for longer-dated bonds, to compensate for a higher risk of inflation and lower liquidity associated with longer time frames. But there’s a far simpler definition: an inverted yield curve means that a recession is probably coming.
Now hold on there. Wasn’t everyone with access to a calculator, from the Bank of England to the IMF, predicting the UK economy would enter recession before taking it back? You’re not wrong. But that was at a time when interest rates were expected to peak far lower. Given that inflation has proved far stickier than initially hoped, and interest rates are now expected to peak as high as 6.5 per cent, the economy’s future prospects are far bleaker.
This raises some uncomfortable questions. First, higher rates raise the risk of the Bank of England over-correcting, not only to bring inflation down but also to claw back lost credibility on price stability. What if 5 per cent interest rates are enough, and it just takes time to filter through as households come off their fixed-rate deals?
In fairness to the Bank, the available space for a theoretical soft landing (cutting inflation without precipitating a recession) was never very large. The UK economy is barely growing – indeed it remains 0.5 per cent smaller than pre-pandemic levels, while the Eurozone is 2.2 per cent larger and the US (Happy 4th of July!) a stunning 5.6 per cent. If your economy is essentially flatlining and you start to raise interest rates, there is really only one destination: negative growth.
But second, what the yield curve says about the UK economy more broadly. Not only a recession in the short-term, but that investors are so nervous about our future prospects that they are prepared to accept lower yields over the long-term. In other words, as concerned as they are about the present, they are even more alarmed about the next few years. Which suggests that, recession or not, the economic pain will be with us for some time.
In the comment pages, Matthew d’Ancona argues that the New Conservatives are proof Tory MPs don’t care about governing. Anna van Praagh says sorry Naomi, the truth is for a lot of women it can be too late for kids. While Josh Barrie hits back at Lilly Allen’s claim that London’s restaurants are no longer a match for New York.
And finally, Flora Gill on what The Idol gets so wrong about dirty talk — and how to get it right.
