A colleague asked me how I would score Boris Johnson. In one sense that’s a pretty open goal: no coherent political philosophy, chaotic management, a trust deficit, record high taxes, inflation at a 40-year high and mountains of debt. However, history may be kinder, especially if Boris writes it.
His legacy will depend on Brexit. At the moment it does not look good. Deteriorating relations with our major trading partner, a legal tussle over the Northern Ireland protocol (and possible abrogation of international treaties), no bonfire of regulation and migration still a major political issue. The coalition of insular Englishness and free trade internationalists that delivered Brexit is fragmenting. Arguably, this is as much the cause of Boris Johnson’s departure as Partygate, scandals, and personality.
To be fair, Covid derailed Boris Johnson, but the weaknesses were evident for all to see long before. Nevertheless, in 20 years’ time his impact on Britain will be as great as that of Thatcher’s. At the moment we don’t know whether he will be hailed as a saviour – the man who unshackled Britain from the moribund European monolith – or a man who consigned Britain to a generation of relative economic decline, in which the debate on Europe never went away. In my opinion, one thing is clear – Brexit would not have happened without Boris. A good reminder that outcomes are not all always about sweeping trends, but are sometimes determined by the personality of individuals.
The limitations of herd mentality
A thing in Boris Johnson’s favour is an ability to challenge consensus thinking. Central bankers have proved less adept, developing a group-think mentality in recent years. Yes, there were voices warning about the continuation of over-stimulation – but not many. In other areas we need to be open-minded and to contemplate change. How will we fund the NHS and improve health outcomes? What role does government have in raising productivity? How do we deal with the economic and social consequences of an ageing population? How do we improve our creaking infrastructure? It was, ultimately, his greatest failure that he could not craft a coherent political philosophy to deal with these mega challenges.
There are calls for a quick transition to a new Prime Minister. I would take the opposite view. Britain will not grind to a halt and it will be a good reminder that what drives Britain is its people, not its government. We will cope and surprise ourselves. Let’s see a debate on the relative merits of candidates, not clamour for the quickest solution.
Markets shrugged off the news
So, how have markets reacted? The bellwether test is the currency. On this measure, markets have shrugged it off. Sterling has been weak against the dollar in recent months, but there was no real change on the news. Indeed, global events continue to dominate. Over the week, UK 10-year yields were higher, ending above 2.2%. There is a feeling that a new Prime Minister will want to emphasise traditional Conservative policies through a renewed focus on tax cuts. This won’t be easy, given the debt burden and may even provoke a more hawkish response from the Bank of England – hence the rise of 25 basis points (bps) in two-year gilt yields last week.
Fears about a US recession still persist in markets but there was some good news last week. Purchasing Managers’ Indexes (PMIs) were generally stronger than consensus, and jobs data a lot better than expected, pushing 10-year treasury yields back above 3%. Implied inflation has been on a downward trend in recent weeks, despite the headlines. At the 20-year horizon, market pricing of UK inflation (about 3.5%) is similar to the levels prevailing through 2017 and 2018 when inflation was in a 2-3% range. The market is now buying into the transitory story.
What about credit? Well, there was a respite towards the end of the week with a better tone evident. However, spreads remained wide in both investment grade and high yield. Sterling non-gilt indices ended with spreads above 160bps, compared with sub-100bps at the start of the year. There was an interesting new issue from the Church Commissioners, with sales of 10-year and 30-year bonds. Both bonds were issued at a spread of 120bps, towards the tighter end of the expected range, indicating that there is demand for well-structured bonds despite the present environment. High yield spreads rallied from an early sell-off and ended the week at lower spreads. However, new issuance activity remains very subdued, and we are not seeing a lot that excites us at present.
A career with real risks
I was sorry to hear about the murder of ex-Prime Minister Abe in Japan; it is a salutary reminder that politicians face threats and intimidation as part of their job that most of us would find difficult to cope with. So, let’s not be too harsh on people that come into public life. Yes, some may be self-serving, some may be inept but they are human and expose themselves and their families to public scrutiny, ridicule and much more. To read that Boris Johnson has cancelled his belated wedding celebration at Chequers sums up the pettiness that is ingrained in some of our attitudes.
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