The U.K. Is In A Rough Patch

The outlook for the British economy is sub-par.

Each summer, I enjoy watching a bit of the British Open golf championship. The links-style courses are set naturally into the landscape, with many close to the seashore. The scenery is beautiful.

To be honest, I also like watching professionals try to overcome rain squalls that soak to the skin, grass that is thicker than hay and bunkers whose faces are taller than the players are. One year while he was in his prime, Tiger Woods counted himself lucky to break 90 in particularly abysmal Open weather. At the time, a friend noted that he could finally claim that his scores were comparable to Tiger’s.

Watching the play at Royal Liverpool this year, I saw a parallel between the plight of the golfers and the challenges facing the British economy. Both have to deal with an inhospitable environment and a series of steep obstacles.

Britain is enduring the same post-pandemic economic afflictions that other countries are, but their manifestation in the U.K. has been more severe. Real gross domestic product is still below its 2019 level, long after other developed countries pushed through that threshold. U.K. inflation reached a much higher peak than it did elsewhere and remains elevated in spite of aggressive interest rate increases from the Bank of England. British equity indices have far underperformed those from other developed markets over the past year, and the pound hit a new all-time low against the U.S. dollar last fall.

Rising interest rates have pressured national budgets around the world, but Great Britain has been challenged most of all. Almost one-quarter of its national debt is indexed to inflation; as a result, interest costs now compose more than 10% of government revenues, by far the highest fraction in Europe. Britain’s annual budget deficit has risen to more than 5% of gross domestic product (GDP), larger than those seen in Greece and Spain.

Britain’s bond markets have become especially sensitive to fiscal developments. The penalty for reckless budgeting last fall was severe: the gilt crisis that took hold last September will make it very difficult for the government to support the economy by going further into debt.