MacroScope

Britain heading for rude awakening?

January 20, 2010

 UK_DFTEZ0110

 

There is a divisive election ahead for Britain, the threat of a ratings downgrade on its sovereign debt and a deficit that has ballooned into the largest by percentage of any major economy.  UK stocks, bonds and sterling, however, are trundling along as if all were well. What gives?

For a fuller discussion on the issue click here, but the gist is that all three asset classes  are being support by factors that may be masking the danger of a broad reversal. UK equities have been driven higher by the improving global economy, bonds held up by the Bank of England’s huge buying programme and sterling by valuation and the distress of others.

But with the Bank of England’s buying spree due to end soon and the possibility that UK voters won’t give a clear victory to either the Conservatives or Labour, meaning political stalemate, is this set to change?

Royal Bank of Canada does not go as far as saying it will. But it says it is clear that not enough attention is being paid the prospect of  politics grinding to a halt and failing to solve the fiscal problem

Many sacred cows will have to be sacrificed in the years ahead, and this will require effective leadership, imagination, and courage. But the danger is that because of the political situation, the country is instead left with weak government, temporary expedients, and initiatives that are the lowest common denominator of long and exhausting negotiation.

Britain is not yet headed back to the 1970s, in our view, but such economic and political recidivism cannot be ruled out. Policy makers and money managers would do well to consult their history books and be alert to the errors and failings of 35 years ago

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