Good morning. As of yesterday, we’re in a new phase of economic crisis: the one where you wake up and anxiously check whether the Asian markets have given the pound a pummeling while you were asleep. If you preferred it when you could just think about a cup of coffee and whether you have any clean pants at 7 in the morning, I empathise very deeply.
So the first thing to tell you is that a short while ago, the pound was worth $1.08, a slight recovery from yesterday’s nadir of $1.03. That came after Kwasi Kwarteng tried to calm investors by promising a debt reduction strategy, but not until the end of November - and the Bank of England said it would not make an emergency increase to interest rates.
Many analysts are still predicting the pound could plumb further depths – and the rate the government pays to borrow also look set for its biggest ever monthly rise. Meanwhile, mortgage lenders including Halifax and Virgin Money paused new loans yesterday in response to the crisis. All in all, it can’t be the reaction to the non-budget Kwasi Kwarteng and Liz Truss were hoping for. Nor is a YouGov poll for the Times which shows Labour with a 17-point lead.
So what does all this mean for ordinary people, and what might happen next? After the headlines, the Guardian’s special correspondent Heather Stewart talks us through some of the scenarios. You may not wish to read them over breakfast.
Five big stories
Labour | Keir Starmer will attempt to take on the mantle of Tony Blair on Tuesday by describing Labour as the “political wing of the British people”. In his speech at Labour conference, he will accuse the Tories of losing control of the economy and ceding the political centre.
Italy | Matteo Salvini, the leader of Italy’s far-right League, has promised that his alliance with Giorgia Meloni’s Brothers of Italy will deliver a lasting coalition, as Italians prepare for their most rightwing government since the end of the second world war.
Iran | The EU and the US are considering further sanctions against Iran over the attempt to suppress demonstrations in response to the death of 22-year-old Mahsa Amini in a police detention centre. More than 75 people have been killed in the crackdown, a rights group said yesterday.
Edward Snowden | Vladimir Putin signed a decree on Monday granting Russian citizenship to US whistleblower Edward Snowden. Snowden fled to Russia in 2013 to escape prosecution after leaking secret files, published by the Guardian, that revealed the US National Security Agency’s surveillance operations.
Nasa | A multimillion-dollar spacecraft collided head-on with an asteroid the size of a football stadium on Monday in an unprecedented test of Nasa’s capacity to defend Earth from a doomsday scenario. The craft successfully crashed into the asteroid Dimorphos 6.8m miles from Earth.
In depth: ‘Hope is not a strategy’
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Best-case scenario: a passing storm
To Liz Truss and Kwasi Kwarteng, the logic that underpinned last week’s fiscal event is not unravelled by a temporary fall in the value of the pound. In an interview on Friday, Kwarteng suggested “markets move all the time”. Yesterday, Tory MP and Truss supporter Sir John Redwood said that “every now and then [markets] attack sterling … I see nothing that has changed in the last two or three days to change the budget judgment.” They would point to the pound’s recovery later on Monday as evidence for that case.
Meanwhile, Heather said: “They don’t mind interest rates being a bit higher – Kwarteng has complained that the bank hasn’t reacted quickly enough over the last couple of years. They think the pound will bounce back, and then tax cuts and their other reforms on the supply side will give you a boost to growth.”
The energy support package is also likely to reduce the scale of any recession – and gas prices are falling fast, which could make an intervention priced at £60bn for six months much cheaper.
Yesterday’s trouble isn’t even really the government’s fault, the front page of the Daily Mail suggests today: instead, blame lies with “the city slickers betting against UK PLC”. Those looking for reasons to be cheerful might also point to the fact that a fall in the pound will make exports cheaper, and tourism to the UK more attractive. “But the value of the pound is not the only thing that determines exports,” said Heather. “Buyers are also looking at things like customs barriers.” You might remember Brexit involving some of those.
There may also be more takeovers of British companies, which look cheaper to foreign buyers because of the weakness of the pound – and that’s good news for City bonuses!
What would it mean for ordinary people if all of this comes off? A growing economy with more jobs and taxpayers keeping more of their earnings. “They believe that, in the end, people will see this is a government that backs business, and that means more investment in the UK, and that’s how we’re going to get out of this,” Heather said. “That’s the theory, anyway.”
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Worst-case scenario: catastrophe
If fantasy dystopias aren’t for you, perhaps skip to the next section. To be clear, though, what follows isn’t science fiction. Here are some forecasts the Bank of England included yesterday in a “severe but plausible” risk scenario it has asked UK banks to stress test: UK GDP falling by 5% over 12 months. Inflation hitting 17%. Unemployment doubling. Interest rates hitting 6%. And house prices falling by 31%.
That’s not a forecast, the Bank is careful to note – but there are plenty of alarming signals for those of a pessimistic bent, and some analysts have compared the UK’s approach in recent days to that of an emerging economy, which has no choice but to borrow more even as the cost of doing so goes up. The Japanese bank Nomura now expects the pound to slide below parity with the dollar, to $0.95 by the first quarter of next year, and acidly notes: “Hope is not a strategy.”
That would mean even more severe pressures on the cost of living. One sixth of imports to the UK are from the US, and would all become significantly more expensive as a result. The many commodities which are priced in dollars would make many other items more expensive too, and threaten businesses’ survival. The price of petrol would also keep going up. The wage increases required to keep pace would add to inflation – or leave people drastically worse off if they fail to materialise. (Read more about how a weaker pound could affect you here.)
The Bank’s Monetary Policy Committee has for now refused to hold an emergency meeting and put interest rates up outside of its usual schedule – but when they do rise, “that could spark a crisis of confidence”, Heather said. “There is the risk of a ‘doom loop’” – a spiral of increasing interest rates and rising inflation which more than wipe out the benefit of any pro-growth policies and gain a momentum that is very hard to stop.
If mortgage rates keep going up, homeowners could start to default in significant numbers – with the number coming out of fixed rate deals peaking just when markets expect interest rates to hit 6%. Even those who reasonably argue that the property market is overheated fear the consequences of it collapsing all at once.
Ultimately, this kind of scenario would leave everyone worse off. Continued increases to the cost of government borrowing might be met with drastic cuts in the austerity mould – from a far lower base than George Osborne had in 2010. The poorest would suffer the most. All this would surely mean Liz Truss’s rapid defenestration: a Tory MP tells Aubrey Allegretti that “talk of no-confidence letters going in is not misplaced”, which would be funny if it weren’t for … everything else.
This kind of catastrophic outcome is not the most likely course of events, said Heather. “There are lots of things that distinguish the UK from an emerging economy. But it is genuinely worrying. When Osborne compared the UK to Greece in 2010, that was hyperbolic – but we have a much higher debt-to-GDP ratio now. It’s a much more realistic prospect.”
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The best-guess scenario: lasting damage
For a sense of how dire the markets’ view of the British economy is at the moment, consider this: the UK now pays a higher rate of interest to borrow over five years than Italy and Greece. The worst-case scenario may not come to pass, but there are real fears that it may be far closer to reality than Kwarteng and Truss’s promised economic revival.
While the Bank of England has rejected calls for an emergency meeting to put interest rates up for now, “it does feel as if we’re moving to a higher interest-rate environment, though I suspect it won’t get to the 6% that’s been priced in by the markets,” Heather said. (Richard Partington and Larry Elliott write that the Bank’s wait-and-see approach is “a far cry from the cavalry arriving”.)
Kwarteng’s promise yesterday to outline the government’s debt-reduction strategy in a statement at the end of November did not significantly reassure markets. And while a promise to publish Office for Budget Responsibility analysis to accompany that statement was welcomed, “it may show debt rising indefinitely into the future.” There is also the prospect of “spending cuts to reassure the markets that the public finances are sustainable,” Heather said.
Whatever happens next, many analysts believe it will involve sustained pain for ordinary people – with higher inflation, higher unemployment, higher mortgage payments and lower public spending. One thing that is all but certain not to feature: a fundamental shift in the government’s approach barring a full-on backbench revolt. “There is real hardship ahead,” Heather said. “But they seem committed to this course.”
What else we’ve been reading
Simon Usborne followed the stories of three house sales at £25,000, £250,000, and £27m. The result is a timely, and dizzying, portrait of the disparities in the UK’s property market – where the total value of one home will only buy you 14 tubs of moisturiser to put in the refrigerated bathroom cabinet of another. Archie
The cost of living crisis has forced more and more people to significantly reduce how often they hang out with their friends. But socialising isn’t a luxury, writes Daisy Schofield – it’s a fundamental human need. Nimo
Paul Whitehouse and Simon Day reminisce entertainingly about the making of The Fast Show. Nuggets include why Whitehouse’s mum never liked the “Suits you, sir!” Tailors. Archie
In the US in 2021, at least 1,600 schools in 24 states had implemented a four-day week for students and staff, up from 257 schools in 1999. Susie Armitage spoke to the students, parents and teachers about how this change has impacted their lives. Nimo
The entire history of popular music is available to many of us for free and at the touch of a button, Alexis Petridis writes. But has this made us lazy listeners? Nimo
Sport
Football | England drew 3-3 with Germany at Wembley in their final Nations League match. England rallied from 2-0 down to lead 3-2 in a dramatic second half before Kai Havertz pounced late on.
Football | The scale of UK government efforts to facilitate the Saudi Arabian takeover of Newcastle United have been detailed in documents released under a freedom of information request. They show a minister promised the Premier League he would secure a response to a proposed “way forward” from “the highest levels of the Saudi government”.
Rugby | Worcester Warriors have been put into administration after being suspended by the Rugby Football Union from all competitions, leaving the club condemned to relegation and plunging the Premiership into turmoil.
The front pages
The tumbling pound dominates today’s front pages. The Guardian leads with “Sterling crisis deepens as Truss’s strategy unravels”. The Financial Times has “Bank of England and Treasury fail to calm market nerves over UK finances” while the Times says “Bank vows to step in after day of turmoil”. The Telegraph has “Spooked lenders ditch new mortgages in pound chaos” and the i newspaper has a similar take with: “New mortgages blocked amid UK market turmoil”. The Express says “Don’t panic! We have got a plan to cut debt” and the Metro goes with “The pound Kwartanks”. The Mail’s splash reads “Fury at the city slickers betting against UK PLC.”
Today in Focus
How US rappers have their music used against them in court
Rappers are increasingly finding their music used against them in criminal trials. But as Sam Levin reports, California is taking steps to limit the practice.
Cartoon of the day | Martin Rowson
The Upside
A bit of good news to remind you that the world’s not all bad
After 45 years in Australia, Philip Jackson moved back home to Barnsley, Yorkshire. But everything was different: at 67, everyone he knew had either left the town or died and he was incredibly lonely. He realised that many older men in his area were as well, so with the help of a modest National Lottery grant, Jackson founded the Barnsley Men’s Shed and later the She-Shed. The initiative is based on the Australian Men’s Shed Association, an organisation designed to combat loneliness through communal woodworking. Members get together once a week, work on their projects and talk about what’s going on in their lives. “It’s like the shed at the bottom of your garden,” says Jackson, “but all your friends are there. It’s a break from people’s weekly routines. It gets them out and talking to similar people.”
Sign up here for a weekly roundup of The Upside, sent to you every Sunday
Bored at work?
And finally, the Guardian’s crosswords to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until tomorrow.
