The US economy has once again confounded the doom-mongers, with GDP growth roaring ahead at an annualised 3.2% in the third quarter, fuelled by a resilient consumer and a labour market that refuses to buckle. Yet for all the razzle-dazzle across the Atlantic, the sober truth is that Britain’s austere approach to fiscal management remains the envy of the developed world. While the Federal Reserve dithers over rate cuts and the US government lurches from one debt-ceiling crisis to the next, the UK’s gilt market has remained a bastion of stability, with ten-year yields anchored below 4%. This is no accident; it is the dividend of a Chancellor who understands that the bond market is the ultimate arbiter of credibility.
Let us be clear. The American economy is a phenomenon. Its entrepreneurial vigour, its capacity for innovation, its sheer scale of consumption – these are forces that no spreadsheet can capture. But beneath the headline numbers, there are fissures. The US deficit is running at an eye-watering 6% of GDP, a level that would normally trigger a stampede for the exits in sovereign debt markets. Yet the dollar remains the world’s reserve currency, allowing Washington to borrow with impunity. That privilege has a shelf life. The day of reckoning may be deferred, but it is not cancelled.
Britain, by contrast, has earned its stripes through years of painful belt-tightening. The Office for Budget Responsibility’s latest fiscal watchdog report shows that underlying debt as a share of GDP is set to fall over the medium term. That may not be the stuff of populist slogans, but it is the kind of boring, actuarial soundness that keeps the international bond vigilantes at bay. The yield premium – or ‘spread’ – between UK and German ten-year bonds has narrowed to just 130 basis points, a far cry from the panic days of September 2022. The message is clear: markets trust British discipline.
Of course, the sceptics will argue that this ‘discipline’ has come at a cost: anaemic growth, public sector underfunding, and a cost-of-living crisis that has squeezed households. These are fair points. But they miss the larger picture. In a world where inflation remains sticky and central banks are walking a tightrope, the ability to maintain low borrowing costs is a strategic asset. Capital flight is the silent assassin of profligate governments, and the UK has largely avoided that plague.
Meanwhile, the US consumer is running on fumes. Savings are depleted, credit card debt is at a record high, and the resumption of student loan repayments is about to act as a fiscal drag. The American economy may feel vibrant for now, but it is living on borrowed time – and borrowed money. When the music stops, the UK’s relative prudence will look like genius.
None of this is to say that Britain can rest on its laurels. The inflation genie is not yet back in the bottle, and core CPI remains stubbornly above 3%. The Bank of England’s balancing act between taming prices and supporting growth is a delicate one. But the direction of travel is encouraging. The housing market has stabilised, business investment is ticking up, and wage growth is finally outpacing price rises. These are the signs of a recovery built on solid ground, not on the shifting sands of monetary stimulus.
The final word goes to the bond market. As any City veteran will tell you, trust is the most fragile asset in finance. The UK has it in spades. The Americans, for all their swagger, are living on borrowed time. That is the bottom line.
