UK stocks have underperformed recently, reflecting growing fears over the credibility of the Labour government led by Chancellor Rachel Reeves. The United States labor market is still struggling and the GDP numbers are a letdown. These issues, combined with a failing bond market, have created doubts about the government’s capacity to steer the economy as needed.
By September and October, labour market data had corroborated this dangerous trend towards weakness, with unemployment figures ticking up. The private sector, including businesses of all sectors and sizes, continued to lose workers, adding to an atmosphere of unpredictability. Chancellor Reeves now finds himself under even more pressure after last week’s move. Now he has the daunting political task of addressing a serious shortfall in the public coffers.
Popularity notwithstanding, the new Labour government had just this week backtracked on its plans to raise income tax rates. This announcement has increased jitters in the UK bond market. After the announcement, UK bonds went through a historic sell-off that prompted a surge of fears about the UK’s fiscal sustainability. The UK is now in the running for the most hawkish stance among G10 countries following the last increase in interest rates. Investors everywhere are watching closely to see how the government will steer through these stormy seas.
The economic landscape is also clouded by weakness in the GDP numbers that have come out in recent months. The pound is having a hard time against every currency in the G10. Over the last month, it would have been just the Japanese yen had a worse record. The challenges currently confronting the UK economy must strike a chord with the questions above. Where or how will Chancellor Reeves fill the gaping hole in public finances and still remain loyal to the government’s fiscal orthodoxy?
Uncertainty continues to hang as other stakeholders wait for concrete plans from the new Chancellor to turn around fiscal policy. Leverage the unpopular decisions. The credibility of the Labour government is at stake as it faces these immediate economic challenges. The interplay between fiscal policy and economic performance will be critical in determining the trajectory of the UK economy as it grapples with these ongoing issues.