Impact on Labour’s ladder: bonus gap with Germany at highest level in 34 years: ALEX BRUMMER

Among the great current advantages of Great Britain, compared to its European competitors, Germany and France, is political stability.

The election with a landslide majority for a Labor government promised much-needed calm after the Conservatives

turmoil and hope that bond yields, which help determine the cost of fixed-rate home loans, would retreat from the peaks seen after Liz Truss’s disastrous mini-budget.

It hasn’t been like that at all. UK bond yields might have been expected to approach those of Germany, where the ratio of debt to national output is a creditable 63.5 per cent.

The government in Germany has fallen and France is governed by the most fragile of coalitions.

The economy the Conservatives handed over to Keir Starmer was in poor health: Britain was forecast to be among the fastest-growing G7 economies this year and next, and inflation was approaching its target.

Instead, a gap of 2.30 percentage points has opened between the yield on ten-year British government bonds and that on German bonds.

The gap is at its highest level in 34 years and is wider than at the time of Truss’s tantrum in 2023. UK bond rates, at 4.5 per cent, are much higher than those in France and Italy.

Until recently, the divergence could be partly explained by German and French economic prospects heading towards recession and stagnation, respectively, as the British economy accelerated.

That’s not even remotely the case anymore. In six months, the Labor Party, which came to power promising change and growth, has proven to be economically inept. Chancellor Rachel Reeves’ promise to “fix the foundations” has turned out to be a pipe dream.

The cost of living rose to 2.6 percent in November, from 2.3 percent the previous month.

This hot on the heels of data showing wage growth accelerated to 5.2 percent from 4.9 percent in the previous three months.

The increase was largely driven by the private sector. The negative influence of Labour’s generous productivity-free public sector deals and an increase in the minimum wage cannot be ruled out.

At a time when central banks around the world are cutting interest rates to stimulate output, the Bank of England is expected to keep rates at 4.75 percent at today’s monetary policy committee meeting.

This contrasts with the European Central Bank, which cut short-term rates to 3 percent last week and the US central bank, the Federal Reserve, which last night reduced borrowing costs by a quarter of a percentage point to 4.25. percent. between 1 and 4.50 percent, its third consecutive movement.

Caution on Threadneedle Street is largely due to rising wage costs and inflation moving away from its target.

Rachel Reeves’ decision to raise an extra £25bn from businesses by increasing employers’ national insurance has been a calamity.

As money is being sprayed into the public sector, without efficiency targets, it does nothing to alleviate the government’s borrowing and debt burden.

It does precisely the opposite. Many companies are raising prices to cover the cost. That, in turn, will make it harder to meet the 2 percent inflation target, keeping interest rates high longer, raising the cost of servicing the national debt.

However, in a false comment yesterday, the Chancellor continued to insist she had not increased taxes on workers.

Not directly, but the rise in national insurance has hit workers’ business and employment prospects hard and raised the cost of filling shopping trolleys.

How unpleasant the shock has been for the country’s economic prospects is illustrated by the latest survey by the CBI business group.

The love affair with the Labor Party comes to an end. It reports that “business confidence has collapsed in the wake of the budget, driving up costs” and leading to investment cancellations. Manufacturing production has plunged at the fastest pace since mid-2020, the peak year of the pandemic.

The Bank’s correct response to a setback of this scale should be to boldly cut interest rates. There may be a short-term price increase, but it is unlikely to last as demand declines. The Bank claims that its actions are based on data.

The old lady needs to do Reeves, her former employee, a favor to avoid stagnation or worse.