UK’s ‘pro-growth’ government has only made a recession more likely

theguardian.com:

Liz Truss became prime minister promising to shake things up and she has certainly done that. In less than a month, the new government has sent interest rates soaring, crashed the pound, torpedoed the property market, made recession inevitable and left her party on course for a defeat of epic proportions at the next election. Not bad for starters. The encore will have to be good to match the debut performance.

As the economist Mohamed El-Erian has noted, the mayhem since Kwasi Kwarteng’s mini-budget was more typical of the stuff that happens in developing countries than in rich, developed nations.

A full-blown emerging market-style crisis still looks a long way off because, unlike a troubled emerging market, the UK has its own currency and can in the last resort print pounds to cover its borrowing.

But the UK is running both a whopping trade deficit and a big (and growing) budget deficit, and relies on investors to finance them. Truss can dismiss criticism of her plans all she likes, but the fact remains that last week’s events have made the UK appear a much riskier place for those investors, who are now demanding higher interest rates to take a punt on the UK.

So, while some stability had returned to currency markets by the end of last week, with the pound back to around the levels it had been before Kwarteng announced his tax changes, this has come at a cost. Bond yields – effectively the interest rate the government pays on its new borrowing – have risen sharply. “In effect the UK now has to offer much higher returns to global investors to sustain the same currency value that prevailed, with much lower rates, before the announcement,” says Krishna Guha, of the investment banking advisory firm Evercore.

The government has