Like the start of his mother’s reign all those years ago, King Charles III’s reign has begun in the middle of a war. Today, it is the war in Ukraine. In February 1952, it was the Korean War.
Like now, the British economy in 1952 was in trouble. Inflation averaged almost 11 per cent, the second consecutive year in which a conflict far away was leading to rapidly rising prices at home. The economy expanded a mere 1.6 per cent. Yet circumstances thereafter improved enormously, thanks to the armistice signed between North and South Korea in July 1953. Growth accelerated and inflation tumbled, both in the UK and elsewhere.
Economically, the ideal outcome at the beginning of His Majesty’s reign would be something similar. Yet neither the King nor the rest of us can rely on such hopes. While the Korean War ended quickly, the later Vietnam War dragged on. The Americans printed more and more dollars and inflation became more firmly embedded. The 1973 Yom Kippur War, meanwhile, lasted a fortnight yet the economic reverberations were still being felt more than a decade later as a result of the subsequent quadrupling of oil prices.
In response to our latest energy shock, the Prime Minister, Liz Truss, has offered a near-term palliative for the British economy. The subsidy on energy prices will keep headline inflation lower than it otherwise would have been, reducing the hit to real incomes. And, whatever your views on fracking, there has at least been an acknowledgement that the UK can no longer rely on gas supplies threatened by Vladimir Putin’s ability to turn the spigots off.
Yet Truss’s energy policy is a gamble. She hopes to buy time by increasing Government borrowing heavily. To that extent, her policy bears comparison with the fiscal support schemes offered to businesses and workers in the midst of the Covid pandemic. Back then, a financial bridge was built between a pre-pandemic past and a post-pandemic future. As such, much of the economic infrastructure that might otherwise have disappeared during lockdown was preserved.
Pandemics, however, don’t tend to last indefinitely. In Covid’s case, within a few months there was quiet confidence that vaccines were on their way.
Faced with an energy shock, however, the commitment is more open-ended, for the simple reason that acquiring gas when there isn’t much of it around is tricky. You can’t just build a new gas pipeline from, say, Qatar overnight, nor wish a new liquid natural gas terminal into being with a wave of a magic wand.
Our new energy policy leaves the UK economy vulnerable in two important ways. First, if the Government is to borrow a lot more, someone is going to have to lend a lot more. Persuading creditors to come forward may be costly, in part because so many other governments are trying to raise additional funds simultaneously. At the beginning of August, the benchmark 10-year gilt yield stood at 1.8 per cent. It’s now at 3.1 per cent, a remarkable increase in just a handful of weeks.
Second, if investors begin to question the Government’s policies, sterling is likely to dive. To be fair, sterling’s recent weakness is far from unique: the euro has also been in the doghouse. In both cases, higher gas prices are threatening inflation, recession and huge budget deficits. Most investors would rather own US dollars. The war in Ukraine has turned the US into something of a financial safe haven while, for the rest of us, import prices threaten to surge.
We’ve seen these vulnerabilities before. In the mid-Seventies, Harold Wilson’s government tried to lower unemployment even as inflation refused to go away. The markets’ verdict was far from favourable. Sterling rapidly fell on the foreign exchanges and government borrowing costs rose steeply. Eventually, the IMF was called in. Admittedly, things might have been different had oil prices not remained so high but that’s not what happened.
Still, amidst the economic mayhem the evidence suggests the Queen rekindled an already warm relationship with Wilson, who had returned as Prime Minister for a second time. For Truss, that might be a comforting thought. She should remember, however, that having promised tax cuts and rapid growth when he took office in 1970, Edward Heath was booted out four years later. Unlike Wilson, his relationship with the sovereign was frosty.
