Good morning. There has been no new meaningful data released this week that might prompt a change in perceptions of the British economy: no inflation update, no unemployment figures, no OBR forecast. Nevertheless, chancellor Rachel Reeves is facing what many observers see as a crisis.
UK borrowing costs have risen throughout the week, and yesterday the pound fell to a 14-month low against the dollar. The chancellor has an “iron grip” on the public finances, a Treasury spokesperson said on Wednesday. The fact that this kind of response was deemed necessary, and that it had no discernible impact on the mood among investors, is one measure of the situation the government is in.
There is no doubt that Labour’s tax and spending plans are under pressure, and Reeves is now considering deeper cuts to spending in unprotected departments. But the markets calmed yesterday – and some analysts see the situation as an overreaction to market conditions, with a path for Reeves to come out the other side with her authority intact.
For today’s newsletter, the Guardian’s economics correspondent, Richard Partington, explains what’s going on. Here are the headlines.
Five big stories
Climate crisis | Climate breakdown drove the annual global temperature above the internationally agreed 1.5C target for the first time last year, supercharging extreme weather and causing “misery to millions of people”. The average temperature in 2024 was 1.6C above preindustrial levels, a jump of 0.1C from 2023.
Los Angeles | Crews are scouring through the rubble in Los Angeles with cadaver dogs in search of additional victims from the fires that have forced tens of thousands to flee and reduced entire neighborhoods to ash. With 30,000 acres burned, the death toll has risen to 10, authorities said.
US politics | Barack Obama, Bill Clinton, Donald Trump, George W Bush and Joe Biden were among the attenders at the state funeral of Jimmy Carter. Thousands of attenders gathered in Washington DC to pay tribute to the 39th president, who is being laid to rest in his home state of Georgia.
Ukraine | Volodymyr Zelenskyy has urged western allies “not to drop the ball” in their support of Ukraine once Donald Trump returns to the White House. “It’s clear that a new chapter starts for Europe and the entire world just 11 days from now,” the Ukrainian president said.
UK news | The head of security at accommodation for vulnerable disabled asylum seekers has been removed from his duties over concerns about his alleged support for the far-right English Defence League and Tommy Robinson, the Guardian has learned.
In depth: ‘The hope will be that once the froth subsides, calmer heads might prevail’
You may have felt blessedly free to forget what a gilt is in the two years since Liz Truss and Kwasi Kwarteng’s disastrous mini-budget. It is with regret that I dust off Economics for Dummies (I don’t need it, you need it!!) to give you a reminder.
Here’s an explainer from 2023. In short: gilts are UK government bonds, or promises to pay a lender a future sum – plus an annual interest payment, the yield – in return for their money today. They are bought and sold by traders after their initial issuance by the Treasury.
When gilt prices on the market are high, that is a sign that investors think they present a sound investment. When they go down, that is because they fear that their money will be worth less when they get it back. Bond yields rise when gilt prices fall. So when investors have less confidence in the UK economy, yields go up.
And in the last few weeks, that’s exactly what has been happening: yields on 10-year gilts (where the principal will be repaid in a decade’s time) have gone as high as 4.89%, their highest since 2008. Yields on 30-year gilts have been at their highest level since 1998. That means that government borrowing costs more. If that persists, it will be enough to wipe out the £9.9bn headroom that Reeves gave herself at the budget.
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What is the main cause of borrowing costs going up?
The view of most credible analysts is that the events of recent weeks are primarily being driven by the prospect of Donald Trump’s presidency, and his threat to impose tariffs on imports to the US.
“That is the overwhelming factor, in my view,” Richard said. “Tariffs could stoke inflation, because they get passed on to consumers buying goods made overseas. That could force the Federal Reserve to keep interest rates higher for longer.” High inflation is the bond trader’s nightmare, because it erodes the value of their loan.
Those impacts come alongside Trump’s suggestion he will pursue large corporate tax cuts and increases to public spending – inflationary again – and the forced deportation of undocumented migrants, which could have a similar effect by pushing up wages. “The US is a supertanker in the global market,” Richard said. “It has an influence on bond prices and yields for everyone else.” Bond yields have gone up in the US, Germany, Japan, France and a host of comparable countries.
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Are there domestic factors as well?
Borrowing costs have risen by more in the UK than in most countries. “The government is not blameless for the conditions in markets,” Richard said. He points to respected surveys showing a decrease in consumer and business confidence. “It might be exaggerated for the Conservatives to say that this is what happens when socialist governments tax and spend their way into trouble, but there is legitimate criticism for sure.”
For one thing, that decline in confidence may partly be attributed to Labour’s negative messaging. Then there is the impact of the rise in employers’ national insurance contributions, a tax that Labour raised because it had ruled out any changes to the big revenue raisers of VAT, income tax and employees’ national insurance.
“Companies are saying they are being forced to pass that on in the form of higher prices, which means an increase in inflation,” Richard said. “On the other hand, they may also cut staff, which would mean weaker wage growth, which would be disinflationary. There is a lot of uncertainty about that still.”
Against a rough economic backdrop, growth figures have been disappointing since the budget, and the UK economy is in a long period of stagnation. There is a fear of “stagflation”, where poor growth is coupled with high inflation and is therefore difficult to take on with a rate cut. The increase in borrowing costs is also a reflection of traders’ fears that there will either be a recession or a big intervention from Rachel Reeves in response.
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What is the government doing?
Ministers are treading a tightrope: on the one hand, insisting that nothing unusual is going on, and, as chief secretary to the Treasury Darren Jones told the House of Commons yesterday, “UK gilt markets continue to function in an orderly way”; and on the other hand, making that point in unusual statements that are themselves an indication that something out of the ordinary is afoot.
That the Treasury issued two statements in two days to insist that Reeves maintains her grip on the economy is highly unusual, but the government was at pains to say that it was a response to a question from a journalist, rather than any formal intervention.
By saying that they see no panicked behaviour among traders and reinforcing that the government will stick to its fiscal rules, ministers do appear to have calmed the markets somewhat, and the 10-year gilt yield fell back slightly yesterday. But the more significant action may lie ahead.
“We’ll get inflation figures next week, and labour market data the week after that,” Richard said. “The Bank of England’s monetary policy committee will say what it’s doing on interest rates in February. And then the OBR will publish an updated economic and fiscal outlook report on 26 March.” If the economic picture remains disappointing but the MPC feels unable to go for a rate cut, Reeves will have to decide what to do to deal with the loss of her economic headroom that will result.
As Richard notes in this piece, Reeves has “created something of a triple lock for herself”: a commitment not to break her fiscal rules on funding day to day spending through taxation, a promise not to increase taxes further and a promise not to return to austerity. If something has to give, it is most likely that she will bring spending down.
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Is there a chance this is all being overblown?
Some of the doom-laden headlines of recent days – like the Daily Telegraph’s splash describing the Treasury comment that Reeves has an “iron grip” on the public finances as “stepping in to halt market mayhem” – may be a bit premature. “It is possible that the data coming out soon will be in the government’s favour,” Richard said.
Some analysts think that bond traders are overreacting. “I think they have a point,” Richard said. “Many investors and market analysts at credible institutions still expect to see reductions in interest rates if growth is weak.”
Even if that is likely, the danger is that traders’ reactions could become a self-fulfilling prophecy in the meantime.
“There’s definitely that danger,” Richard said. “But it feels like we’re in the middle of a short-term flurry of activity in the bond market.” Importantly, the level of activity in the bond market is not comparable to the crisis after the Truss-Kwarteng mini-budget. “Yes, the gilt yield is higher, but you aren’t seeing the kind of extreme movements that you get in a real crisis. So the hope will be that once that froth has subsided, calmer heads might prevail.”
If not, Reeves will have some brutal decisions to take. Doing so will probably head off an economic crisis. But for Labour, significant cuts to increases in public spending would probably constitute a political one, instead. “They have options available,” Richard said. “But there will be real consequences for the public, and politically, they are boxed in.”
What else we’ve been reading
I already feel like an expert in the art of doing a half-arsed job – readers insert your own joke here – but Leena Norms offers some tips for even masters like me on how to be slapdash (and happy about it). Toby Moses, head of newsletters
For years before he was stabbed to death at the age of 14 earlier this week, Kelyan Bokassa’s mother had tried to prevent his recruitment by drug gangs. Gaby Hinsliff writes that his grooming and subsequent killing are an indictment of a society that fails to see “children at risk of gang exploitation for what they really are”. Archie
Zoe Williams is rightly scathing on the case of a 77-year-old climate activist stuck in jail because her wrists are too thin to be allowed out with an electronic tag: “every known movement of change has relied on non-violent action to disrupt the status quo”. Toby
As Rowan Atkinson turns 70, Ryan Gilbey assesses his best movies and ranks (sorry, ranks!) them. It’s interesting partly because he comes away a little underwhelmed: “It is one of the enduring frustrations of British cinema that Atkinson never quite found the vehicle to marry his verbal sophistication with his physical pliability.” Archie
The Guardian’s lobby team have worked with Redwan Ahmed in Dhaka to explore the links between Tulip Siddiq, the UK’s city minister, and the deposed Bangladeshi regime led by her aunt, Sheikh Hasina. The photo of her with Hasina and Vladimir Putin in 2013 atop the article is quite something. Toby
Sport
Football | Everton sacked manager Sean Dyche just three hours before kick off, leaving caretakers Leighton Baines and Séamus Coleman (pictured) to navigate a 2-0 FA Cup third round win over League One Peterborough. The club’s former manager David Moyes is the owners’ top target to take over.
Rugby | Former Scotland rugby union captain Stuart Hogg will be supervised for a year as an alternative to serving jail time, after he admitted abusing his estranged wife over the course of five years. The 32-year-old was handed a community payback order with one year of supervision when he appeared at Selkirk Sheriff Court.
Tennis | Andy Murray says he would be comfortable with being the subject of angry outbursts on-court from Novak Djokovic, his new coaching charge, as the two former rivals prepare for their first tournament together at the Australian Open. Murray said: “I’m absolutely fine with him expressing himself how he wants.”
The front pages
The Guardian leads with “World temperatures overshoot 1.5C Paris deal limit for first time”, as the Sun goes with “Lost Angeles” on the raging California wildfires. The chancellor’s economic plans are also in focus, with the Times reporting “Rattled Reeves searches for new ideas on growth”. The Telegraph says ““Reeves ‘missing in action’ on debt crisis” and the Mail has “UK faces crisis like the 1970s, Reeves warned”.
The Financial Times splashes with “Musk seeks plan to oust Starmer as prime minister before next election”. The Mirror, meanwhile, reports that the government’s counter-extremism unit is monitoring the billionaire’s online posts in “Musk hate probe”.
Something for the weekend
Our critics’ roundup of the best things to watch, read, play and listen to right now
Film
A Real Pain | ★★★★★
With no great fanfare, Jesse Eisenberg has just given us a masterpiece. This is an effortlessly witty, fluent and astringent comedy with a very serious overcurrent. It is a road movie which is partly about the Holocaust and about America’s third-generation attempt at coming to terms with it … As writer, director and joint lead actor, Eisenberg generously allows his film to be dominated by co-star Kieran Culkin, whose performance is heartbreaking and hilarious – comparable to his Roman Roy from TV’s Succession, but with something else, something more unreadable. His face is always alive with irony, comedy, playful hostility and mischief, switching moods with quicksilver speed. Peter Bradshaw
TV
Jerry Springer: Fights, Camera, Action | ★★★★☆
This documentary series assembles key players from the most notorious talkshow in television history, focusing mainly on its 90s heyday (the show ran, slightly startlingly, until 2018) when it was revolutionised by “diabolical genius” Richard Dominick. He felt himself bound only by law when it came to deciding what could be screened. “If I could execute someone on TV,” he says, “I would.” What is remarkable in this documentary is the denial and evasion of responsibility that persists, even now, from almost everyone involved. Lucy Mangan
Book
The Bright Side by Sumit Paul-Choudhury
Humans are always caught between the delusion of wearing rose-tinted spectacles, and the debilitating affect of taking them off. Should we prioritise accuracy or happiness? Sumit Paul-Choudhury comes down firmly on the side of optimism in this lively exploration of glass-half-full thinking and its relationship with social progress. What initially feels like it might be a self-help book turns into an eye-opening history of the idea of optimism, before exploring its potential to help us address social and ecological challenges. The tension in our relationship to optimism, between its motivating and its delusional possibilities, is present throughout. Huw Green
Music
Lambrini Girls: Who Let the Dogs Out | ★★★★☆
For the most part, Lambrini Girls’ debut album barrels along in roughly the style that’s hoisted the Brighton duo to cult success over the last few years. There are huge, distorted basslines courtesy of Lily Macieira and equally distorted guitar playing from Phoebe Lunny that flits between post-punk angularity and occasional bursts of poppier, Ramones-y chords. The rhythms are frantically paced, and there are lyrics that focus on societal ills, delivered in Lunny’s distinctive vocal style: she sings like someone angrily trying to make their point in a particularly noisy bar, as a bouncer struggles to usher them out of the door. Alexis Petridis
Today in Focus
It was a wildlife conservation triumph, then came the corpses
Biodiversity writer Phoebe Weston hears from farmers on the west coast of Scotland who claim they are losing hundreds of lambs a year in a case of rewilding gone wrong
The Upside
A bit of good news to remind you that the world’s not all bad
From walking boots to weight vests, Paddy Maddison spoke to Guardian readers for this piece on the fitness gear that actually works.
Says reader Tim of his £12 pull-up bar (bought during lockdown, naturally): “It’s the best money I’ve ever spent. I hung it on my home-office door frame and made myself do one pull-up every time I went in or out of the room. One pull-up turned into two, then three and so on. Now I practise calisthenics almost daily and recently mastered my first muscle-up. It’s essentially a pull-up where you then push yourself up and over the bar, something I could only have dreamed of being able to do a few years ago.”
Bored at work?
And finally, the Guardian’s puzzles are here to keep you entertained throughout the day. Until Monday.
