Investment Institute
Viewpoint Chief Economist

Macroeconomic Suez

  • 17 October 2022 (7 min read)

  • Jeremy Hunt is launching a fiscal re-set in the UK, even if the full details won’t appear before the end of the month
  • The UK pension fund issue raises questions on potential sources of financial instability elsewhere
  • The “reawakening of the doves” continues on both sides of the Atlantic, but it’s not for immediate consumption

Market forces have proved too strong for the UK’s supply-side, trickle-down experiment. The new Chancellor of the Exchequer has re-set British fiscal policy even if we will have to wait until the end of the month for full details. The next 2 weeks are thus crucial. as investors wait for the final cut of the budget bill amid lingering political instability. The change of tone with the arrival of Jeremy Hunt may suffice to appease the “bond vigilantes” for now, allowing the Bank of England to keep the tap off direct bond market intervention. If pressure lingers, the bar for a resumption of BOE intervention is now probably lower since the moral hazard issue is less acute.

The whole episode could be seen as the natural consequence of “hard Brexit”, with unfunded tax cuts and supply-side reform the sole politically palatable option remaining given the cost of high trade friction with the EU, only to crash against financial reality. The Suez operation in 1956 is a “founding trauma” for modern Britain, as it discovered it was no longer a “Great Power”. This month’s fiscal drama could convince the UK authorities that their capacity to steer a lone path on economic matters is small. Perhaps the silver lining around this cloud is that a re-assessment of the U. K’s relationship with Europe could start. October 2022 may have marked “peak Brexit”.

The issue with the UK pension funds is raising questions on the next potential sources of financial instability. The steep increase in corporate refinancing gaps must be monitored. Fortunately, businesses have taken advantage of the low interest rate period to lengthen the maturity of their debt, which gives time to absorb the shock. Yet, the tightening in broad financial conditions will hurt growth. Central banks are however ready to take risks to break the back of inflation. While the “reawakening of the doves” continues on both sides of the Atlantic, it is not for immediate consumption. For now, the signal from the current dataflow – e.g., the higher-than-expected US core inflation in September – is stronger than the more prudent message from the models.

Download the full insight
Download insight (510.16 KB)

Related Articles

Viewpoint Chief Economist

Taking the Plunge

Viewpoint Chief Economist

The (welcome) Return of Boring

Viewpoint Chief Economist

Independence Wars Ahead?


    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top