Economy

LONDON (Reuters) – Britain’s new economic agenda represents the biggest gamble for growth in a major Western democracy in at least 40 years, for which the chance of success fell instantly as investors ditched sterling assets.Prime Minister Liz Truss’s “Growth Plan” is Britain’s second roll of the dice at economic renewal following the 2016 vote for Brexit which, so far at least, has failed to yield returns.Investors reacted with dismay to the combination of free spending, unfunded tax cuts and huge increases in government borrowing announced by finance minister Kwasi Kwarteng on Friday.His statement marked a step change in British economic policy, harking back to the Thatcherite and Reaganomics doctrines of the 1980s that critics have derided as a return to “trickle down” theory.The pound crashed below $1.09 for the first time since 1985 and British government bonds suffered the biggest daily fall in decades.International observers looked on with bewilderment, even if business groups at home saw merit in many of the plans outlined by Kwarteng, who says low growth is the real gamble.”I’ve rarely seen an economic policy that is as uniformly panned by economic experts and financial markets,” said Harvard professor Jason Furman, former chair of the U.S. Council of Economic Advisers during Barack Obama’s presidency.”It shockingly came in below the low expectations that almost everyone had,” he added.Willem Buiter, a former Bank of England rate-setter and Citi’s chief global economist until 2018, said Kwarteng’s plans to ramp up borrowing were “totally, totally nuts”.”From a cyclical perspective it is, I think, a disaster,” Buiter said, adding that he had no objection in principle to tax cuts for firms and households with a better fiscal balance.”It’s probably the epitome of casino macroeconomics,” said Jacob Kirkegaard, nonresident senior fellow with the Washington- based Peterson Institute for International Economics think tank.In Germany, the director of the German Council on Foreign Relations (DGAP) Guntram Wolff said Truss’s plans amounted to a “Singapore-on-Thames” attempt to deregulate Britain’s economy and boost the City of London.”The economy has more than the City… It is no surprise that pound sterling has lost today,” he said.SLOWLY, THEN ALL AT ONCEOn Thursday Kwarteng said his plans to grow the economy would “build stronger capacity to alleviate inflationary pressure”. On Friday, those plans sparked a market meltdown that will only exacerbate inflation in the months, and possibly years ahead – automatically raising the bar for the eventual success of Kwarteng’s plan. U.S. investment bank Citi said sterling risked a confidence crisis among international investors.”The risk now is that the UK government has diminished its credibility at one stroke, and you saw that with the market runoffs,” said Dan Hamilton, nonresident senior fellow at the Brookings Institution, a U.S. think tank.The collapse in investor sentiment leaves Bank of England Governor Andrew Bailey with a serious problem.”Fiscal and monetary policy are now at war with each other in the UK,” Furman said.Hamilton agreed, adding that this tension was not evident in other major economies. In financial markets, a small number of analysts predict that the BoE will be forced to raise interest rates before its next interest rate meeting.”I think if you if you were Andrew Bailey and you were looking just at the detail of the market moves, you would already have called an emergency meeting,” said Kirkegaard.HISTORY LESSONSBuiter said he could think of few historical parallels for Britain’s new fiscal approach, even if there were superficial similarities with the tax-cutting Thatcher years.Britain’s Institute for Fiscal Studies compared Kwarteng’s statement to a budget in 1972 that similarly sought to double Britain’s rate of economic growth, but is widely remembered as a disaster for its inflationary effect.Furman doubted that Truss would be able to implement her plans before running into some economic hard truths, as happened to Ronald Reagan in the early 1980s.The U.S. Republican president was forced to U-turn on a major tax-cutting drive as the U.S. Federal Reserve jacked up interest rates. Furman said Truss might also have no choice but to undo some of her plans if Britain’s debt problems start to spiral because of higher interest rates.”Sometimes a country’s hand is forced,” he said.($1 = 0.9111 pound) More

The companies signed up for $8.8 billion in new loans, leases and lines of credit last month, compared with $8.5 billion a year earlier, according to the Equipment Leasing and Finance Association (ELFA). Borrowings were up 5% from January.”With the Fed’s most recent 75-basis-point jump in short-term interest rates, and the prospect of a hard landing, time will tell whether — and to what extent — these same business owners continue to grow and invest in equipment,” ELFA Chief Executive Ralph Petta said in a statement.ELFA, which reports economic activity for the nearly $1-trillion equipment finance sector, said credit approvals totaled 75.2%, down from 78% in July. The Washington-based body’s leasing and finance index measures the volume of commercial equipment financed in the United States.The index is based on a survey of 25 members, including Bank of America Corp (NYSE:BAC), and financing affiliates or units of Caterpillar Inc (NYSE:CAT), Dell Technologies (NYSE:DELL) Inc, Siemens AG (OTC:SIEGY), Canon Inc and Volvo AB (OTC:VLVLY).The Equipment Leasing & Finance Foundation, ELFA’s non-profit affiliate, said its confidence index in September stood at 48.7%, compared with 50% in August. A reading above 50 indicates a positive business outlook. More

BUDAPEST (Reuters) – Hungary’s government submitted a second batch of anti-corruption bills to the country’s parliament on Friday as Budapest ramps up efforts to avoid a loss of vital European Union funding that could damage its currency and economy.The EU’s executive on Sunday recommended suspending funds worth 7.5 billion euros over what it sees as Hungary’s failure to combat corruption and uphold the rule of law.Budapest has pledged to draft all the legislation agreed with Brussels after lengthy talks. Hungary’s forint currency and Hungarian bonds have sold off in recent weeks over fears that Budapest would lose billions of euros in EU money.The first draft bill on Monday enhanced Hungary’s cooperation with the EU anti-fraud office OLAF, ensuring that OLAF gets support from Hungarian tax authority officials in its investigations of EU-funded projects and increased transparency over how state asset management foundations operate. On Friday, Hungary’s Justice Minister Judit Varga submitted a raft of further measures, including a bill to establish a body called the Integrity Authority, which will be able to step in when local officials fail to intervene in suspected fraud cases, conflicts of interest or other wrongdoing involving EU funds.The bill would also set up an Anti-Corruption Working Group made up of government and non-government delegates who will be tasked with improving Hungary’s anti-fraud framework.”The Hungarian Government is committed to the full implementation of each corrective measure (17) undertaken as a result of the constructive and intensive co-operation with the Commission,” Varga said in the reasoning attached to the bill.Hungary’s case is the first in the EU under a new financial sanction meant to better protect the rule of law and combat corruption in the 27-nation bloc. Facing rising energy costs, a weak forint and the prospect of a recession next year, Prime Minister Viktor Orban, long at odds with the EU over some of his policies, now looks willing to fulfil EU demands to create institutions that would cut corruption risks in EU-funded projects. Earlier on Friday, Finance Minister Mihaly Varga said the Hungarian economy was headed for a “difficult period” due to surging inflation and higher energy costs, which means the 2023 budget would have to be reworked. More

With their bills sharpened and talons on display, the world’s central banks fully adopted the posture of the hawk this week. Backed by sharp rises in interest rates and currency intervention, they have used pointed language to advertise their singular aim of defeating the scourge of inflation. In one of the most sudden shifts in global economic policymaking in decades, central bankers say they have had enough of rapid price rises and insist they are prepared to act to restore price stability, almost at any cost. But after a week of dramatic announcements from central banks around the world, at least some economists are beginning to ask — are they going too far, too fast?The US Federal Reserve has been by far the most important actor in this shift of temperament. On Wednesday, it raised its main interest rate by 0.75 percentage points to a range between 3 and 3.25 per cent. At the start of the year, this rate had been close to zero.By raising interest rates, central bankers are not seeking to lower the peak rates of inflation caused by soaring gas and food prices, but are aiming to ensure inflation does not remain high © Kiyoshi Ota/BloombergThe Fed signalled that this was far from the end of its monetary policy tightening, with members of its interest rate-setting committee predicting rates would end 2022 between 4.25 and 4.5 per cent — the highest since the 2008-09 financial crisis. In the summer, Fed chair Jay Powell talked about higher borrowing costs ending with a “soft landing” for the economy without a recession and a gentle glide down in inflation rates. On Wednesday, he admitted that was unlikely. “We have got to get inflation behind us. I wish there were a painless way to do that,” Powell said.The Fed’s plan to curtail consumer and business spending in a bid to reduce domestic inflation has been replicated elsewhere, even if the causes of high inflation are different. In Europe, the extraordinary prices of natural gas have sent headline rates of inflation to similar levels as in the US, but core inflation is significantly lower. In emerging economies, declining currency values against the US dollar, which hit a 20-year high this week, have driven import prices higher.

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The Swedish Riksbank kicked off the copycat action on Tuesday with a 1 percentage point increase in its interest rate to 1.75 per cent, its biggest interest rate rise in three decades. Switzerland, Saudi Arabia and the UAE also announced a 0.75 percentage point increase each, which for Switzerland meant ending the period of negative rates that started in 2015. The Bank of England on Thursday raised its main rate by 0.5 percentage points to 2.25 per cent, the highest since the financial crisis, with a near promise of further rate rises to come. Even in Japan, which has long adopted negative interest rates, the authorities felt the need to act to tame inflation. Its finance ministry intervened in currency markets to prop up the yen on Thursday and limit the rise in import prices. It took what it called “decisive action” to address US dollar strength that was pushing the country’s underlying inflation rate to a highly unusual 2.8 per cent rate in August. Economists at Deutsche Bank noted that for every one central bank around the world that is currently cutting interest rates, there are now 25 banks that are raising rates — a ratio that is way above normal levels and has not been seen since the late 1990s, when many central banks were given independence to set monetary policy. Nathan Sheets, global head of international economics at Citi and a former US Treasury official, says central banks are “moving so rapidly that as they put these rate hikes in place, there really hasn’t been enough time for them to judge what the feedback effects are on the economy”.Central bankers have been reluctant to admit they made errors in keeping interest rates too low for too long, pointing out that these assessments are much easier to make with the benefit of hindsight than in real time. But they now want to take action to demonstrate that even if they were tardy in beginning to take action against inflation, they will be sufficiently “forceful”, to use the Bank of England’s word, to bring inflation down. Powell was clear that the US central bank would not fail on the job. “We will keep at it until we’re confident the job is done,” he said on Wednesday. Sweden’s Riksbank was characteristically blunt in its assessment. “Inflation is too high,” it said. “Monetary policy now needs to be tightened further to bring inflation back to the target.”The new stance on monetary policy has been developing through 2022 as the inflation problem became more persistent and difficult for central bankers. By the time many gathered at Jackson Hole in August for their premier annual conference, the mood had shifted decisively towards the greater action that is now being played out around the world. Jackson Hole: the New York Federal Reserve’s John Williams with Fed governor Lael Brainard and chair Jay Powell, who said: ‘We have got to get inflation behind us. I wish there were a painless way to do that’ © Jim Urquhart/ReutersChristian Keller, head of economics research at Barclays Investment Bank, says that “since Jackson Hole, central bankers have decided that they want to err on the side of hawkishness”.“For the first time in perhaps decades they have become afraid of losing control of the [inflation] process,” says Keller, highlighting how central bankers now say they want to avoid the mistakes of the 1970s. Central banks “are taking decisions that come with much risk and this feels better if everyone else is doing it. The result is a synchronised tightening.”With the new attitude, markets are pricing that by June next year policy rates will rise to 4.6 per cent in the US, 2.9 per cent in the eurozone and 5.3 per cent in the UK — projections that are between 1.5 and 2 percentage points higher than at the start of August.By raising interest rates, central bankers are not seeking to lower the peak rates of inflation that have been caused outside the US by soaring gas and food prices, but they are aiming to ensure inflation does not stick at a rate that is uncomfortably higher than their targets. This could happen if companies and employees begin to expect higher inflation, leading to price rises and demands for higher wages. They are willing to ensure that there is pain in terms of an economic downturn to demonstrate their credibility in hitting their inflation targets. Sheets says that, having misread inflation last year, central banks would rather overdo it now. They are balancing the prospects of a recession against the risk of a sustained inflationary episode that would undermine their credibility. “On balance they feel . . . that is a risk they have to take.”An added complication is the models that central banks use — which did not foresee such rapid price rises as the pandemic eased and the war in Ukraine began — are no longer working well in describing economic events. A Ukrainian cannon fires at Russian troops. The models central banks use — which did not foresee such rapid price rises as the pandemic eased and the war in Ukraine began — are no longer working well in describing economic events © Ihor Tkachov/AFP/Getty ImagesEllie Henderson, economist at Investec, worries that “the usual tools and models, which would typically guide such [central bank] analysis, can no longer be relied upon as they are now operating in parameters outside ranges of which they were estimated”.In this uncharted world, Jennifer McKeown, head of global economics at Capital Economics, believes it is difficult to argue that central banks are going too far. “While this is the most aggressive tightening cycle for many years, it is also true that inflation is higher than it has been for decades,” she says. “Inflation expectations have risen and labour markets are tight, so central banks are rightly concerned about the potential for second-round effects from energy prices to wages and underlying inflation.” But an increasing number of economists, led by some big names such as Maurice Obstfeld, former chief economist of the IMF, think central banks are now being excessive in their actions to raise interest rates and that the effect of all this tightening will be a global recession. The World Bank also expressed similar concerns this week.Antoine Bouvet, an economist at ING, says that “central banks have lost faith in their ability to forecast inflation accurately”, which has led them to focus more on today’s actual rates of inflation.Women work in an office in Bond Street, London, during the power cuts of 1973-74. Central bankers now say they want to avoid the mistakes of the 1970s © Evening Standard/Getty Images“Combine this with the fact that they seem to think that the cost of overshooting in their policy tightening is lower than undershooting and you have a recipe for over-tightening,” he explains. “I would characterise this policy choice as almost overshooting by design.”According to Holger Schmieding, chief economist at investment bank Berenberg, “monetary policy works with a lag, [so] the risk is that the Fed will notice only belatedly that it has gone too far if it now raises rates well beyond 4 per cent”, resulting in unnecessarily long and deep recessions. But as many economists explain, no one really knows what is too far and not far enough in this environment. Central banks therefore want to ensure they eradicate inflation, allowing them to correct course and lower interest rates later if necessary. Krishna Guha, vice-chair at Evercore ISI, says there is a “serious risk” that central banks are overdoing the tightening, but he contends the Fed is right to err in the direction of doing too much.“At the global level, as well as at the US level, it is probably better to overdo it than underdo it and risk a 1970s redux,” says Guha. “But that of course only makes the outcome of overdoing it more likely.”  More

The UK, says Kwasi Kwarteng, chancellor of the exchequer, is now “at the beginning of a new era”. He is correct. It is new in his willingness to pour scorn on the past 12 years of Tory rule. It is new in the size of his gamble with economic stability. It is new in his promises for a transformation in the rate of economic growth. But the question is not whether this era is new. It is whether it will be an economic success, a failure or an outright calamity. The chancellor has announced as his objective a “trend rate of growth of 2.5 per cent” a year over the medium term. According to the Office for Budget Responsibility’s forecasts last March, the work force should grow at some 0.5 per cent a year between the first quarter of this year and the first quarter of 2027. Between the first quarter of 2008 and first quarter of 2022, trend growth of output per worker was also 0.5 per cent a year. On the assumption that the government is not planning to open the floodgates on immigration, the target suggests that the growth of productivity must quadruple over the next five years. The chancellor also stated that “our plan is to expand the supply side of the economy through tax incentives and reform.” Are the measures outlined in the speech likely to achieve any such transformation? The answer is “no”. Kwarteng proposes, for example, an acceleration in approval of infrastructure projects. Over a long period that should speed growth a little. But it is inconceivable that the unapproved projects of today will be transforming the economy within just a few years.The chancellor has also reversed tax increases introduced by his predecessor, Rishi Sunak. But, as Ian Mulheirn of the Tony Blair Institute notes: “It’s hard to see how returning the tax system broadly to where it was in 2021 is now going to stimulate long-term growth.” Kwarteng also decided to cut the top rate of income tax back to 40 per cent from 45 per cent. Is there any reason to suppose that this will release waves of entrepreneurship? Under Thatcher, the top rate was slashed from 80 per cent to 40 per cent. It is debatable whether even that improved performance significantly. This mouse of a change surely cannot do so. That is even truer of the cut in the basic rate from 20 per cent to 19 per cent. For economic performance, these changes are totemic, not real. For income distribution, however, they will be perfectly real, not totemic.If the supply side promises are a fantasy, the fiscal and economic risks are not. The permanent tax cuts amount to close to 2 per cent of gross domestic product. According to Paul Johnson of the Institute for Fiscal Studies, the chancellor announced “the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up”. To this must be added an emergency energy package set to cost £60bn in just half a year.Especially at a time of rising interest rates, such largesse is sure to raise questions about debt sustainability. Indeed, the market is already asking them. How might the government respond? Presumably by slashing spending. We have no indication of where and how. Furthermore, this huge increase in the fiscal deficit occurs in a country that ran a current account deficit of 8.3 per cent of GDP in the second quarter of 2022 and has a tumbling exchange rate, low unemployment and already high inflation. Who could seriously regard this huge fiscal loosening as responsible? The Bank of England will be forced to tighten sharply. The government might then pour blame upon it for the results of its own decisions.In sum, this mini-Budget will do nigh on nothing to raise medium-term growth, but risks serious macroeconomic instability. The failure to ask the Office for Budget Responsibility to assess its impact is simply scandalous. This government may be indifferent to painful reality. But reality usually wins in the [email protected] More

Good eveningA borrow and hope Budget on a scale not seen since 1972.That was the verdict of economics editor Chris Giles on UK chancellor Kwasi Kwarteng’s debt-financed package of £45bn in tax cuts and other measures which aims to shift the country from a “vicious cycle of stagnation into a virtuous cycle of growth”. Although billed as a “mini-Budget” the chancellor’s statement was anything but. Headline measures included the scrapping of the 45p top rate of tax for earnings above £150,000 and a cut in the basic rate to 19p, alongside previously flagged moves such as lifting the cap on bankers’ bonuses and cutting stamp duty on property sales. The government yesterday confirmed it would reverse the recent rise in National Insurance contributions. City of London institutions welcomed Kwarteng’s “love-bomb” of regulatory changes but reaction in financial markets was harsh. UK government bonds sold off sharply, with this week’s rise in long-term borrowing costs now one of the biggest on record. The pound fell to a 37-year low against the dollar, as investors took fright at the cost of the chancellor’s “radical economic gamble”.The challenge facing Kwarteng was underlined by data ahead of his speech showing UK consumer confidence at its lowest since records began in 1974 and PMI survey data highlighting manufacturing and services activity at a 20-month low. These were preceded by new Bank of England projections yesterday showing GDP falling 0.1 per cent in the third quarter, fuelling fears the economy was heading for recession, as it raised interest rates by 0.5 percentage points to 2.25 per cent — the highest level since the financial crisis in 2008.Also unclear is how the measures will be welcomed by the public, which, according to new survey data yesterday, support increasing taxes and welfare spending, with strong support for redistribution to benefit the less well-off.Chief economics commentator Martin Wolf is one of the sceptics, arguing that “the idea that further tax cuts and deregulation (such as lifting the cap on bankers’ bonuses) will transform this [economic] performance is a fantasy”.Referring to Truss and Kwarteng’s “Britannia Unchained” paean to free markets of 10 years ago, Wolf says: “Britannia is not ‘unchained’. It is instead sailing in perilous waters. Can the new captain and first mate even see the rocks that lie ahead?”Key linksFT quick guide to the mini-BudgetWhat it means for your walletFull text of Kwarteng’s speechTreasury documentsLatest newsOil slides to lowest level since January on recession fearsCanada’s retail sales decline for the first time in 7 months UK paves way for large expansion of onshore windFor up-to-the-minute news updates, visit our live blogNeed to know: the economyThe BoE was just one of many central banks increasing interest rates over the past few days, led by the US Federal Reserve with its third 0.75 percentage point rise in a row as Fed chief Jay Powell warned of more pain to come. There were also rate rises in South Africa, Switzerland and Norway. Turkey remains an outlier, cutting rates for the second consecutive month. Our latest Big Read asks the question: is the trend going too far and risking unnecessary economic pain? Shrinking business activity and a falling currency is not confined to the UK. Today’s PMI reading for the eurozone showed the biggest contraction in 20 months, leading the euro to hit a fresh 20-year low against the dollar. EU consumer confidence has also hit a record low.Latest for the UK and EuropeLiz Truss wants to settle the post-Brexit row over Northern Ireland before the 25th anniversary of the Good Friday peace deal next month. Listen to the latest Rachman Review podcast for more on the new British PM’s approach to foreign affairs, including the war in Ukraine and relations with the US and China.Italy goes to the polls on Sunday. Here’s our Big Read on what a (likely) far-right victory could mean for Europe. FT subscribers can join our correspondents for a special briefing on September 27. Get your pass at ft.com/italianelection and submit your questions for the panellists.The head of the International Energy Agency warned of the political dangers facing the EU as member states hurry to find solutions to the energy crisis. In the UK, the proposal to lift the moratorium on fracking for natural gas has triggered a severe backlash. In Denmark, petrochemicals group Ineos announced the development of the first oil and gasfield in years.Irish youth are increasingly considering emigration as their country’s cost of living crisis — especially around housing — intensifies.Global latestHong Kong ditched its strict hotel quarantine rules for incoming travellers that have dealt a severe blow to the city’s economy for the past two years.Tokyo intervened to support the yen for the first time in over 20 years after the Bank of Japan’s decision to stick with its ultra-loose monetary policy sent the currency diving. The BoJ is now the only central bank in the world with negative interest rates. Pakistan should suspend international debt repayments and restructure loans following recent devastation from floods, according to a UN memo seen by the FT. Need to know: businessHigh inflation, low investment confidence and a weaker currency are making struggling UK assets tempting for overseas suitors, with French buyers first in the queue. Companies editor Tom Braithwaite considers the great UK rummage sale.Furniture retailer Made.com has put itself up for sale after being hit by a collapse in UK consumer confidence and supply chain disruption.The UK launched a probe into the $15bn cloud market to see if Amazon, Microsoft and Google were limiting competition and innovation. The three companies generate about 81 per cent of market revenues.Crippling energy price rises could lead to “deindustrialisation” in Germany, according to some business figures. The latest sector to sound the alarm is the toilet paper industry.Science round upCovid-19 infections have rebounded in England and Wales but have fallen in Scotland and Northern Ireland, complicating attempts to determine the disease’s grip on the UK.Chief US medical adviser Anthony Fauci told the FT that the demonisation of Covid-19 jabs could harm childhood immunisation programmes and lead to outbreaks of disease. Denmark’s non-profit Novo Nordisk Foundation is to spend $200mn developing what it says will be the first practical quantum computer for life sciences research. Applications range from creating new medicines to finding links between genes, environment and disease.And finally, a reminder that disruption from the war in Ukraine extends beyond planet Earth. Russia’s threat to quit the International Space Station has put extra impetus behind efforts from other countries to find a replacement for the ageing structure. Check out our Big Read (and its top notch graphics).Get the latest worldwide picture with our vaccine trackerSome good news…Ospreys, almost wiped out locally by hunters many years ago to protect salmon and trout stocks, are now breeding successfully in several parts of the UK.Ospreys, once nearly wiped out in the UK to protect salmon and trout, are breeding successfully © AP More

Financial markets assess the health of a nation’s economy, and its political stability, in two ways. The fledgling Truss-Kwarteng administration is off to a shaky start, at least as far as the government bond and currency markets are concerned.Let’s begin with bond markets. Buyers of UK government bonds express their level of satisfaction, or concern, through the yield demanded on government debt. The worse the outlook, and the less confident investors become, the higher the level of compensation they demand.Fixed income markets do not appear impressed. Granted, the 10-year government bond yield bottomed in summer 2020 as the economy began to shake off Covid-19 and inflation stirred, but the benchmark gilt yield has soared since Liz Truss’s Conservative leadership victory on September 5 — hardly a vote of confidence. A jump of almost 40 basis points to an 11-year high on the very morning of Friday’s mini-Budget looks like a thumbs down as well.

Sterling’s ongoing — and apparently accelerating — decline to fresh 47-year lows against the dollar suggests that currency markets are yet to be convinced, either, by the fiscal plan.The government is following the playbook of tax cuts and supply-side deregulation set by the early-1980s Thatcher and Reagan administrations. Some hail them as architects of an economic turnround in the wake of the stagflationary chaos of the mid-to-late 1970s. Share and bond prices have marched higher relentlessly since those reforms, albeit with big stumbles along the way. From that perspective the new residents of Downing Street may be surprised that their programme is getting such an indifferent welcome from the currency, bond and even the stock markets, where the FTSE 100 slid sharply lower on Friday.Part of the reason is perhaps that Kwarteng has less room for manoeuvre than his Conservative predecessor, Sir Geoffrey Howe, did in the early 1980s.Back then, the national debt was less than 40 per cent of GDP, while interest rates peaked at 17 per cent in late 1979 and began to fall in the second half of the 1980s. In contrast, the £2tn-plus national debt today equates to almost 100 per cent of GDP and interest rates look set to keep going up as the Bank of England wrestles with the legacy of its misjudgment that inflation would prove transitory.This may explain why markets are nervous about the currently uncosted nature of Kwarteng’s plans and the initial lack of involvement from the Office for Budget Responsibility.But it may also be rising prices that lie at the source of their concerns. The BoE is now trying to prevent inflation from becoming entrenched in the services part of the economy, subsequently fuelling the cycle of higher prices, higher wages, higher prices and higher wages which bedevilled the 1970s. Then, the trouble originated in the end of the Barber boom in the UK, the free-spending Johnson and Nixon presidencies in the US and the impact of the 1973 and 1979 oil price shocks.Investors with long memories can be forgiven for feeling queasy when thinking about such parallels.The 1970s was a dreadful decade for holders of UK gilts and even the current 3.78 per cent yield on the 10-year gilt looks like something of a return-free risk when set against the prevailing rate of inflation.

Equity investors got it the neck too. Even though the FTSE All-Share quadrupled from its January 1975 low to the end of the decade, the previous collapse meant that the index’s 56 per cent gain across the whole of the 1970s was dwarfed by the retail price index inflation benchmark’s 290 per cent surge over the same timeframe. Only gold bugs ended the 1970s with smiles on their faces as bullion surged from the Bretton Woods-determined level of $35 an ounce to more than $800 by early 1980, helped along the way by Nixon’s withdrawal of the dollar from the gold standard in 1971.With most its earnings coming from overseas, and between 40 and 50 per cent of profits in 2022 and 2023 expected to come from miners and oils, according to consensus forecasts, the current FTSE 100 may be better placed than the 1970s’ FTSE All-Share to shelter investors from any ongoing inflationary storm.But the boom in UK financial assets since the early 1980s has rested on disinflation, falling interest rates and easy money from its central bank. On the face of it, the current environment offers none of those three.Central bankers now seem to be accepting a downturn, or even a recession, as a near-term price worth paying for the long-term gain of lower inflation. But politicians, who think in electoral cycles, are likely to see a downturn, and thus unemployment, as the greater enemy. Voters will be unhappy with inflation, but they will be far more distressed, and likely to put a cross next to someone else’s name at the ballot box, if they lose their job.It was the one-time Labour chancellor Denis Healey who argued that good government constituted “stable prices, jobs for those who want them and help for those who need it”. Investors, workers and voters alike will be left hoping that the government’s supply-side reforms deliver a similar combination of disinflation and growth.The author is investment director at AJ Bell More

The rush to find energy sources outside Russia has helped drive demand for products of oil and gas industry supplier Smiths Group to record highs, as its customers in other countries expanded production. The FTSE 100 company said on Friday that the value of new orders received by its subsidiary John Crane, which sells mechanical seals to oil pipelines and gas pumps, rose almost 11 per cent in the year to July, with its order book reaching the highest value to date.“[The business] is being flooded with orders right now,” chief executive Paul Keel told the Financial Times. “All non-Russian sources of energy are scaling up rapidly . . . They are trying to replace the large lost capacity from Russia.”Keel said the need to increase energy production had been compounded by higher demand as countries exited Covid-19 lockdowns. He expected demand to remain elevated despite a recent surge in energy prices.In the wake of Moscow’s invasion of Ukraine, governments have committed to phasing out imports of oil and gas from Russia, which has long been a key global supplier. But as energy consumption has risen, countries have been under pressure to rapidly find alternative sources, pushing businesses outside Russia to increase production.Smiths, an industrial conglomerate that also manufactures products including airport baggage scanners and satellite parts, said it had stopped sales to Russia this year and was in the process of ending its business in the country. It said the move had cost as much as £19mn and contributed to an overall 57 per cent decline in annual profits before tax to £103mn.Adjusting for exceptional costs, Smiths said profits rose 13 per cent to £372mn. It announced a full-year dividend of £142mn, equivalent to 39.6p per share, a 5 per cent increase over the previous year.Shares in the group rose 2 per cent following the release of its results.Despite the rising demand for its products, Keel conceded that disruptions in the global supply chain had limited the company’s ability to immediately capitalise.Although orders across the group had risen more than 11 per cent during the year, revenues grew just 4 per cent as the supply chain crisis affected the number of products Smiths was able to ship.“It’s hard to get some components and so it can cause your supply chain to be not as efficient,” Keel said. There are “hundreds of products that we would like to get tomorrow that we have to wait a week, a quarter, a month to get”. More