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Our views 22 November 2021

JP’s Journal: North, South and public spending

5 min read

As a Northerner who has lived most of my life in the South, I am amazed at the shift in political allegiances I have seen in recent years. My wife comes from Hartlepool, a place I have visited often.

Twenty-five miles down the M6 from where I grew up is Stoke on Trent. Famous for its six towns, it has suffered significantly from the demise of manufacturing, losing out to Manchester and Birmingham. These two places have something in common: they are represented only by Conservative MPs.

This political shift is massive and reflects a combination of factors: the leftward shift of the Labour Party under Jeremy Corbyn, social conservatism, Brexit, and a more populist message from the Conservatives. But whatever the cause, the governing party is now an uneasy coalition of two core groups. Traditional Conservatives, mainly based in Southern or rural constituencies, and more urban-based Northern MPs, most newly elected in 2019.

Last week’s announcement on the cancellation of the eastward leg of HS2 (High Speed 2) to Leeds highlighted these differences. It may well be the best option – but it exposes the tensions inherent in this coalition. Many of the new intake will feel let down. What is clear to me is that transport infrastructure is woeful in the North compared to the South – particularly trains. In terms of connectivity, quality of service and reliability, the North is a poor relation. A lot of work has been done on the power of cities to drive local economies. In the likes of Liverpool, Manchester, Leeds and Newcastle we have fantastic resources to drive our economy. Yes, a faster link between Manchester and Leeds is being promised and Warrington to Manchester will get a new track – but if we are truly to rebalance there needs to a better thought through plan.

This is just one example of the fault line. Social care is another, and the apparent backtracking on care costs will not play well with Northern Conservative MPs. From a policy perspective it is likely that the levelling up agenda will ingrain a higher State spending attitude, making government debt reduction more difficult. Indeed, the speech by the Governor of the Bank of England (BoE) last week (pointing out the growth in public sector employment, relative to the private sector) highlights the shift that is going on.

Cash and government bonds

The main headline grabbing announcement last week was the UK Consumer Price Index (CPI) data, which came in at 4.2%, the highest rate since November 2011.The Retail Price Index (RPI) hit 6.0%. A jump in inflation had been expected reflecting higher energy and transport costs and does not change my view that a December rate rise would be irrational given the failure to go in November – when markets had been fully prepped. Signs of early Christmas buying buoyed UK retail sales data while jobs data was relatively strong.

In the US, retail sales and industrial production suggested that activity growth was broadly in line with business survey indicators. In Europe, Covid cases remain a concern with renewed lockdowns scheduled and even mandatory vaccination being planned in Austria. The euro was the main casualty and it has lost about 10% value against the US dollar this year.

Despite the inflation background government bonds were strong last week with the euro area and UK leading the way. UK 10-year yields moved below 0.9% and real yields moved further into negative territory. Implied inflation hardened across the yield curve although still below the levels of late October. In the US long-term rates declined – but the move was less marked.


More of the same from credit last week. Some weakness in investment grade bonds – with credit spreads a couple of bps wider. There was more movement in high yield markets with spreads now not much changed on the year. This disguises the significant movement in different parts of the high yield market and the pain seen in emerging market debt.


Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.