There has been a lot of hyperbole, exaggeration and vitriol in the UK following last week’s mini budget. Screams that the new PM is driving the country into recession and a property crash. Demands that she should change course. 

Lots of it has failed to put the market moves into perspective. This is a global event caused by Federal Reserve tightening. It is not just the pound that is at decades long lows against the mighty dollar. It is the Yen, the Won and, yes, even the Euro. 

It is not just the Bank of England which is rushing to keep up with the Federal Reserve’s rapid and significant base rate rises. It is not just the UK which is seeing mortgage rates rise rapidly as a result. It is happening all over the world. In Canada, Australia, New Zealand, the Netherlands, South Korea and, yes, even the USA itself — where a September surge saw mortgage rates hit a level not seen in 20 years.

The media is also failing to put the rate rises into perspective within a UK context. There have been hundreds of apocalyptic articles and news reports about the rise in mortgage rates and how these will cause the whole property market to crash. Much of it is so exaggerated that it can only be designed to scare and panic people.

What happens next — once the furore has ended

The reality is that for those on a tracker mortgage (which follows the Bank of England base rate), the rate has increased from 1.75 per cent to 2.25 per cent or +0.5 per cent. According to U Switch, each 0.5 per cent rate rise on a £150,000 mortgage with 20 years remaining would add £38 per month to repayments. For those on a Standard Variable rate mortgage (SVR), the average SVR has risen from 3.74 per cent to 4.74 per cent. This average one per cent increase in the SVR would add £76 a month and £17.50 a week to repayments. Yes, some mortgage holders will be hurt by rising interest rates — but please, UK media, can we at least try to put this into perspective?

I am not here today to look at the failings of the media to put the mini budget into perspective. I am here to look at what happens next — once the furore has ended and the markets start looking at the actual data.

It might be helpful to look at two recent economic forecasts: one from the National Institute of Economic & Social Research (NIESR) providing updated forecasts for the UK economy after the mini budget, and the other from Deutsche Bank on the EU economy just a couple of days before. First the NIESR: 

We now forecast the energy support guarantee, together with the tax cuts announced today, will lead to positive GDP growth in Q4 of this year, shortening the recession and raising annual GDP growth to around 2 per cent over 2023-24.

Second, Deutsche Bank:

The bank now expects EU-area growth to decline 2.2 per cent in 2023, from a previous forecast for 0.3 per cent decline. Germany & Italy are most at risk, given their reliance on Russian gas. German GDP is expected to drop 3.5 per cent in 2023, & Italy is forecast to see a 2 per cent decline.

The NIESR forecast has now been joined by others, including the French banking giant BNP, which also sees UK growth in Q4 2022 (avoiding a UK recession by their estimation) and about two per cent GDP growth in each of 2023 and 2024.

Meanwhile, other economists are updating their forecasts for the EU 27 and all are pointing to higher inflation and a deeper and longer recession. 

As the data begins to come through, the markets are looking at a building consensus that the budget will not only save the UK from recession in 2022, but will also lead to about two per cent GDP growth in each of 2023 and 2024 at a time when Germany and the EU will be entering a deep and long lasting recession.

Growth wasn’t the only issue worrying commentators. One of the most hyped complaints was that the Government’s spending commitments and tax cuts (really reversed tax rises) would be financed out of increased Government borrowing. For example, Paul Waugh of the I described this as “a bumper bunny of borrowing” as part of “Kami-kwasi economics”.

Let’s look at the NIESR forecasts again:

We expect the extra government spending and tax cuts to increase the government deficit … we now forecast public sector debt to rise to 91.6 per cent of GDP in 2024–25, rather than fall to 87.5 per cent of GDP.

So, a four point increase in debt to GDP to 91.6 per cent. How does that compare to the current debt to GDP per centage for the rest of the G7? In Japan, debt to GDP exceeds 240 per cent. In the USA, it is 124 per cent, Italy 122 per cent, in France 115 per cent and in Canada 110 per cent. Only Germany, with debt to GDP of 70 per cent is below the UK (and some forecast this figure to exceed 80 per cent as a result of the upcoming recession)

91.6 per cent doesn’t seem particularly bad in comparison. Does it?

The borrowing increase leaves the UK one of the least indebted G7 nations

This might well turn out to be a pessimistic estimate. This week the CEBR published an article entitled “Public borrowing may be less out of control than the markets think”. It estimated that instead of the Government borrowing an extra £154b in 2023/4, borrowing will be nearly 60 per cent less at £64b, and that the Government will actually (on forecasts) run a tiny surplus in 2025/6. Although they do not publish debt to GDP forecasts, my back of the envelope calculations suggest in this scenario UK debt to GDP would actually fall to the mid 80 per cent range. 

The UK budget does increase borrowing to fund the energy support guarantee, tax cuts and investment incentives intended to drive higher long term growth. But the borrowing increase is by no means bumper a bunny. It still leaves the UK as one of the least indebted G7 nations and is forecast to drive higher growth of about two per cent per annum at a time when the EU 27 are forecast to see GDP fall between 2-3.5 per cent.

When the panic, hype and vitriol subside and the markets stop being driven by sentiment, the UK position will start to look relatively rosy. If these forecasts hold true (which depends largely on the future actions of the Federal Reserve) the Truss/Kwarteng mini budget will be recognised as one of the key reasons for that.