Big miss for UK borrowing, as retail sales get boost from good weather

What a difference a day makes. Yesterday was all about the future of the UK economy and the potential for £150bn of big tech US investment in the UK economy. Today the focus is on more dour matters and elevated levels of public borrowing, and unbridled spending under the Labour govermment.

Public sector borrowing was much higher than expected for August, at £18bn, up £3.5bn since August 2024, and the highest August borrowing figure for 5 years, at the peak of Covid. Borrowing in the financial year to August was £83.8bn, an increase of £16bn compared to the same period a year ago, and the second highest April – August borrowing figure since records began in the 1990’s.

UK borrowing like it’s 2020

The highest recorded borrowing during this period was 2020. This suggests that the UK is borrowing at the same rates as during the Covid era, although, thankfully, the pandemic is behind us. Public sector net debt is now 96.4% of GDP, 0.5% higher than a year earlier. Rachel Reeves’ new measure of public debt net financial liabilities was 84.5%, but even this is rising sharply, it is higher by 2.5% vs. August 2024.

Sustainability of borrowing rate and size of UK state in question

This is going to lead to calls about the sustainability of public finances, and the need for tax rises at the upcoming Budget. However, many of the hard-working people that Kier Starmer and Rachel Reeves are pledging to protect will wonder why public spending can’t be cut, and they always have to pay more in an ever widening net of taxation. It could also lead to questions being asked about the size of the UK state, as well as the cost of public services vs. private.  

The pound has sunk on this data, and is testing support at $1.3500, it is the second worst performing currency in the G10 FX space today, and is lower by 0.33% vs. the USD. The UK’s bond market is extremely fragile, 10-year and 30-year yields rose sharply on Thursday, although global long end yields were higher, the UK was the weakest performer across Europe and the US.

UK bond yields could rise further on this news, especially as the Bank of England is maintaining its ‘careful and gradual’ approach to loosening monetary policy. Although the BOE has reduced the amount of bonds that it is offloading from its balance sheet, especially long end bonds, they are still shrinking their balance sheet albeit at a slower pace. Thus, the BOE cannot be relied on to relieve pressure on the long end of the Uk Gilt curve.

The pound falls as UK bonds remain under pressure

The UK bond market will be in focus later this morning, if yields rise sharply then it could weigh on the pound, and GBP/USD is continuing to extend losses and is testing critical support levels at $1.3480. A convincing break of this level could open the door to a substantial move lower to $1.3350.

The problem for the pound is fiscal, the FX market is focusing on the bad news for public sector finances, and not the better-than-expected retail sales for August. This could be because bar a pickup in seasonal sales due to the hot weather in August, retail sale volumes fell by 0.1% in the 3 months to August, compared to the 3 months to May, and volumes of sales have not returned to their March peak. This suggests that the UK economy is still unable to repeat Q1’s performance, and the growth outlook is likely to remain constrained as we move through the second half of the year.

US stocks reach fresh record highs

Elsewhere, US stocks made record highs on Thursday, after the tech rally received another boost. This most recent rally has been led by the second-tier tech ‘mini giants’ who are outperforming the Magnificent 7. Intel was the top performer on the S&P 500 yesterday; Uber Technologies made a fresh record high and Palantir also rose 5%, although it is just shy of its August record. Whether this rally can be sustained, and what pain could be inflicted on UK bonds after the latest public sector borrowing figures will be front and centre on Friday.