In a surprising turn of events, the British economy is showing signs of unexpected vigour while the narrative of American economic resilience begins to fray at the edges. For years, the mantra from the City has been that the US leads, and the UK follows, but the latest data suggests a potential role reversal. The US economy, long heralded as the bastion of post-pandemic recovery, is now showing cracks. Inflation there remains stubborn, with the Fed’s rate hikes failing to cool the labour market as anticipated. Meanwhile, UK gilt yields have stabilised after the turmoil of last year, and consumer confidence, while fragile, is not collapsing as feared.
This divergence is partly explained by the different fiscal approaches. Chancellor Sunak’s austerity-lite budget, while criticised as timid, has at least prevented the kind of fiscal incontinence that is spooking US bond markets. US treasuries are selling off as the market prices in a higher term premium, reflecting concerns about the sustainability of American debt levels. Capital flight from the US is beginning to benefit the pound, which has strengthened against the dollar in recent weeks. The irony is not lost on seasoned observers: the UK, the sick man of Europe just a year ago, now looks comparatively stable.
But before we pop the champagne, caution is warranted. This is not a story of British dynamism but of relative US weakness. The underlying structural problems of the UK economy: low productivity, a rigid planning system, and a creaking infrastructure remain. The defying of the odds is more a commentary on the crumbling of the American myth of invincibility. Global markets are reassessing, and they don’t like what they see on the other side of the Atlantic. The question now is whether this is a blip or a trend. For the UK, the opportunity to capitalise on this moment is there, but only if the government can resist the temptation to squander it on pre-election giveaways.
