Any normal person reading the term “gilt yields” will think quite reasonably: big, another abstract indicator of general economic gloom, to be interpreted in different ways by politically motivated people who probably understand them as little as I do. That’s true, but if there’s a day to watch the nut market, it’s today, because the yield on ten-year gilts hit a level this morning not seen since the 2008 global financial crisis.
What this means, as briefly as possible, is that the market is pricing in a much worse economic future for Britain. Bonds are part of debt, and in bond markets, investors extract higher returns by bidding less for the debt – so the yield or yield moves in the opposite direction to the price. Higher yields mean that the market is paying less for the debt, and this is a prediction: money will be worth less (that inflation will be higher), that borrowing will be more expensive (that interest rates will be higher), and that the government will have to sell much more debt to the market (it will have to borrow more). Individual investors may have different ideas about which of these factors is the most important, but the market this morning presents a grim forecast for Britain: that our country will experience much higher inflation, that the Bank of England will have to try to control it by making borrowing more expensive, and that the government’s already strained finances will take another hit as the state bails out people and the situation.
This market reaction may be partly the result of higher government borrowing figures, but the war in Iran is perhaps the bigger issue. As we saw in 2022, exogenous inflation (higher prices imposed by forces outside our control, in the wider world) could have dire consequences for the British economy and British politics. In a single year the government spent £51.1 billion on energy support policies, but inflation still reached double digits, 345,000 businesses still went bankrupt – the highest figure on record – and the government’s fiscal plans almost caused pension funds to collapse. In the global economy today, there are signs that the next wave of inflation may be similar, if not worse.
Until now, most politicians have been reserved in their predictions about the effects of Trump and Netanyahu’s war on Iran on the British economy. The public has mostly only seen price increases at the gas pump, caused by the closure of the Strait of Hormuz (through which one-fifth of the world’s crude oil and liquid natural gas is transported) and attacks on the region’s fossil fuel infrastructure. But the price of energy soon becomes the price of everything, and this is already starting to happen. The Strait of Hormuz is also the conduit for 35 percent of the world’s urea, the most common type of nitrogen fertilizer. Half of the world’s food production relies on nitrogen fertilizers.
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On Wednesday, the CEO of Dow, the largest US chemicals company, said that about half of its polyethylene supply is “offline, restricted or affected” by the war in the Middle East. Polyethylene is the most common plastic in the world – the world’s bottle, cardboard and packaging of goods, many of which (clothes, toys, appliances) are also made from it. The Drewry World Container Index of shipping costs has risen 14 percent in a few weeks. Airlines are already planning for fuel shortages. The UK energy price cap is likely to rise by 19 per cent this summer.
All this is happening while oil prices remain relatively low. The totemic price of $100 a barrel may sound like it means what it has meant in previous decades, a peak unlikely to be sustained for long. But when oil hit $100 a barrel in 2008, it was actually $208 a barrel at today’s prices. Analysts today believe that a long-term closure of the Strait of Hormuz could put similar levels within reach. Prices can be kept down by releasing reserves, but the effect will be temporary and this will also keep prices higher in the long run because reserves must be replenished. The same goes for gas; Europe must spend the summer buying gas to fill its reserves for the coming winter. The vast fossil fuel energy infrastructure that supports the global economy is not something that can simply be turned on and off.
Did Trump and his madness Day-TV-presenter-turned-assistant, Pete Hegsethdo you think it was? Maybe, or maybe they didn’t care. They may have learned from the Russian invasion of Ukraine that energy-fueled inflation favors the rich. They could also just have wandered into someone else’s war, guns blazing, for no better reason than they thought they were doing so. Economically, as a Brit, it doesn’t matter: what is important is that these clowns have blown up not only the lives of thousands of people in the Middle East, but also the careful overhaul of public finances and the economy by our own government. The recession that will almost certainly result from a protracted conflict will have been imposed on us by the country with which many of our politicians still complain that we have a “special relationship”.
Rachel Reeves, however, will be blamed by conservative and reformist politicians who are close to Trump but who will claim an economic downturn as proof of the Chancellor’s failings. This will be unfair – whatever you think of Reeves, she has been an example of prudent spending – but another £50bn shock to the public finances will be a torpedo for other government plans and could open the door to a less zealous and more self-interested party. If the British public voted for anything in 2024, it wasn’t Starmerism or Securonomy, but an end to political instability, and hopefully some economic growth. The governments of America and Israel have decided that these are things we cannot have.
(Further reading: How prepared is Britain for fuel shortages?)
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