Unbroken Britain

0:00Hello and welcome to GEU, the macro podcast that delivers valuable insights into the global economy. I'm Gaurav Ganguly, head of international economics at Moody's Analytics and a special guest here with us today David Muir, who handles much of our UK forecasting David, welcome onto the show and of course Andrew Hunter, a regular presence on GEU, welcome Andrew. Hi Gaurav. Hello, how are you doing? Good, good, thank you. As you know I'm in sunny Dubai, which is actually quite quite quite hot and we'll talk about that in a subsequent episode but today we thought we'd talk about the UK as we have David on and spend some time just reviewing economic performance in the UK and think a bit about where the UK is headed. So let's get straight into it David.

1:03Question, I guess the first question straight out of the starting blocks is how is the UK doing? GDP's been holding up. The macro economy seems to be doing reasonably well, in fact better than we expected at the start of this year. Yeah I think that's true so I think the word that characterises the UK economy is resilience. So we've seen that through most of the years so far. As we've probably spoken about in previous podcasts, the UK got off to a good start at the beginning of the year, we're going to hit 0.6% and then although it's stored slightly into the second quarter, didn't slow by as much as we previously expected and some of the underlying detail in the second quarter was quite reassuring so we saw growth power by consumer spending. So although households were being squeezed by some of the increase and say like motor fuel prices, slightly households were also relying on savings to sustain some consumer spending. We also saw a good contribution from fixed investment, particularly business investment. So overall in the second quarter,

2:05the underlying details within the GDP growth figures were reassuring overall. Then moving into the third quarter, we've only got some initial data for that. We saw growth being sustained into July, showing by the monthly GDP data that outperformed our own expectations and the consensus. It's likely that there are some idiosyncratic factors during the summer that help to first GDP growth in July, thinking about the hot weather that we had then thinking about the world cup, which was a net positive overall for sectors of the UK economy. But the business survey data looking into August has proved to be strong or upbeat as well, suggesting some improvement in business confidence. So overall the underlying details about the UK economy have been, as I said, previously reassuring and resilient overall at least to date.

3:07What do you think has changed though? Sorry Andrew, just to come back to that David, what do you think has changed? Because for the past two or three years, we've been bit nervous about the UK. But now we've had six months of reasonable data even actually coming into Q3, there's some reasonable data. Do you think something shifted or what is it that's driving it? Do you think the consumer really is resilient? Well, they've benefited from the fact that we haven't yet seen the full extent of the rise in inflation. So into the second quarter, inflation did actually moderate somewhat from where it was at the start of the year. There were various one-off factors that contributed to that. So although we saw an increase in things like motor fuel prices, other factors helped put inflation lower into the second quarter, but we've seen that pick up again in July and that reflects some of the feed-through from the rise in natural gas prices that we've seen following the break of the cornflake feeding through into the energy regulators price cap. So inflation is going to rise further into the second half. I'll probably

4:12talk about that in a bit more detail later, but that's going to be more of a headwind for the household sector than it has been so far. Yeah, I was just going to say it's quite interesting. We were discussing a very similar thing for the Eurozone last week. I think it was the latest GDP data again, continuing to hold up surprisingly well. For the rest of Europe, it's mostly a story about consumers remaining surprisingly resilient, but we have, I think, seen weakness in investment generally. But with the UK, it's actually quite notable that both consumption and investment have held up surprisingly strongly so far this year. Whether that will continue, we have our doubts, but the latest signs in terms of the surveys picking up PMIs, consumer confidence, all rising pretty sharply over the past few months. As David mentioned, that monthly GDP figure for July as well. I know the monthly GDP figures are generally pretty volatile. They're

5:18subject to being revised as well. So in general, it's a good idea to not entirely hang your forecast on whatever the latest monthly GDP print is, but it is worth noting that 0.4% for the first month of a quarter does set you off for potentially a pretty solid three months, because even if you pencil in unchanged readings for August and September, even marginal declines, you're potentially still looking at growth in the region of maybe 0.4, 0.5% in the third quarter as well. I think by that stage, although there are still all these different headwinds on the horizon as we can talk about, we would have to then start to think about, is this more than just the usual early year strength that we've seen in the UK in recent years, is the economy actually starting to look a bit stronger in sort of an underlying sense than we've been thinking? Thank you, user word, surprise, more than twice there. Is there a danger here, Andrew,

6:26that one of your pet theories is going to be disproven. If a loser doesn't listen to Andrew regularly, let me just put that out there, put your pet theory out there, one of your pet theories out there. This one is that the UK, historically over the last few years, always displayed the strong first half of the year and then a week second half of the year. Is there a risk here that it actually is going to be a pretty strong second half of the year? Well, yeah, I mean, I'd still have my doubts that the strength that we've seen recently is going to continue all the way into the fourth quarter, but yeah, certainly, as I said, the third quarter is shaping up to be, again, stronger than we've expected in confounding expectations of the usual slowdown. I should explain that a bit more. It's certainly not just my own personal pet theory. I think there is sort of widespread recognition of this pattern that we seem to have seen in the UK data over the past, I think three or four years now, where you get a strong first half followed by a sharp slowdown.

7:31In general, when you look at a pattern like that, it always raises suspicions. I have seen a couple of potential explanations. One, people talking about changes in things like price setting, behavior after the pandemic, and that's ended up causing havoc with the usual seasonal adjustment process. Another factor, which I'm sure we'll touch on a bit more shortly, is that in the UK, we have the annual budget, which tends to come around October and November time, and certainly over the past couple of years, that's coincided with fiscal policy being tight and confidence weakening as a result. So perhaps more of a genuine fundamental reason to expect that growth would be weaker towards the end of the year than at the start. But yeah, we'll have to see if a similar thing happens again. But certainly, yeah, again, based on the latest signs we're seeing for the third quarter, we are potentially looking like we might be breaking out

8:37of that pattern every recent years. But yeah, I'm not necessarily entirely confident that we won't yet see a slowdown at some point. The fastest rate of growth in the G7, wasn't that KSTA was profit-previce? It was, yeah, and I think they've, so because of this strange unusual pattern, they have ended up meeting that target, at least, on the basis of a single quarter or even a six-month period that I think they met it on a couple of occasions over the past year. But it's when it's come to looking at GDP over a whole year that this usual end-year slowdown has end up costing them and they haven't been able to achieve that. The full year forecast is certainly higher than it was back in the spring. So because of that better first half, we've raised it from 0.8 back in May time to 1.2 now. And 1.2 probably is pretty close to UK's potential rate of growth at the moment and it represents not much of a

9:38slowdown from last year. And potential rate of growth that by that year we've been, there's a slight full-it-polybid conditions in the UK. This is a slack in the economy. Roughly speaking, the UK could continue to grow at 1.2% per annum. We're hitting that. We're hitting that. We're hitting that now. Around that estimate, obviously there's uncertainty around that. But previously we thought it'd be a year of underperformance and it does look like we're going to be growing around potential rate for another year. And the trade war, now the UK has done quite well out of its trade deal with the US. So at least got enough reasonably likely. Is that not having any impact? The second quarter exports did expand, but imports also expanded by the same amount which left net trade anyway at a similar level. Net trade making and mutual contribution overall. Yeah, I think if you look at the sort of hit-to-growth from the increase in US tariffs, I mean generally speaking for the UK tariffs, obviously went up in April last year with the

10:40liberation day announcements. We've had a few adjustments, different things going on, but the UK's tariff rate hasn't really changed significantly since then. But I think if you look at the export figures in terms of exports to the US, we did see a clear decline last year, but over the past couple of quarters now they've mostly levelled off. So in that sense the drag on growth should now be fading. Another goes to cheer. New touch to bond, headwinds from prices, price increases David. So the other mix also risk of course is the war at the middle east with Iran. They've backed us and they've got oil prices and we had held the view that things just start to get better from Q3 onwards, allowing oil prices to come down, but the last couple of weeks have disproved that at least temporarily. How considerate of the vaccination. That's right, so we're seeing oil prices higher than we previously expected at our baseline, natural gas prices also rising as well. So both of those poised upside risks to our inflation

11:44forecast. We do expect inflation to rise further from where it is at the moment, so just under 3% in the data for July, our baseline is that it rises to around 3.5% by the end of the year, but clearly the developments around energy prices more recently are posing upside risks to that. We'd say though within that the core inflation forecast is lower. So at the moment core inflation is closer to 2.5%, and we expect it to be lower than the headline rate by the end of the year, as well, and that reflects particular expectations around domestic prices, services in particular. They expect to be broadly steady through the second half of the year, even as we see more upward pressure from food price inflation and energy prices. But that was all predicated off a declining price of oil in the baseline. I think we have

12:45prices going down from 86 to 83 by the end of the year and that continuing to decline. It's if prices do stay at 100 and said, what do you think will happen? Yeah, so in that situation, we'd have to raise our inflation. Now look for, certainly for the headline measure, to the end of the year, and also into early 2027, likely considering the implications for household energy prices through the off-gem price cap. So that is going to rise by 4% in October. That's already in our baseline. We will likely get another increase in January, if that's where gas prices stay around their current rate at present time. So that would raise our early 2027 inflation forecast, slightly above where it is in the baseline at present. Yeah, I think there's definitely upside risks to the headline inflation forecast that we've had based on what we're currently seeing in global energy markets. But yeah, I don't know how you

13:49feel about this, David, but I still wonder if I would be rushing to sort of significantly revise up our forecasts for core inflation. And one of the reasons for that is what we're continuing to see in the labor market, we actually just had the latest data on that this morning as we're recording, which showed that payroll employment is still declining, it's actually been falling for about two years now in the UK, which is kind of remarkable, and quite a contrast to the continued resilience of GDP growth, the labor market remains weak. Unemployment hasn't necessarily risen much further in recent months. It's sort of leveled off at just under 5%, but again, relatively high level by past standards. And generally, all the signs continue to be that the labor market is fairly loose and unsurprising as a result, we're seeing that wage growth has slowed sharply over the past year or two. That slowdown is maybe leveled off over the past few months, but certainly

14:55no signs have renewed upward pressure at this stage. And I guess that's when you're thinking about the potential pass-through from higher energy costs. That's one of the big things that people tend to point to the idea that workers in the face of rising energy bills, they start to push for bigger wage increases to compensate that. And that's then how you sort of get the initial one-off price shock developing into something more entrenched in a more prolonged period of high inflation more broadly. But again, we're just continuing to not really see any signs of that at all. And clearly, we can acknowledge the longer the energy prices remain as high as they currently are. Certainly, if they continue to rise, then I think the risks of those second rounds effects will definitely increase. But certainly for now, I think that the data have continued to support sort of what we've we have always assumed what would happen would be that,

16:00you know, it's mostly going to be a one-off jump in energy prices, maybe some feed-through to other certain goods prices as well. But it's not going to feed through to widespread up-repression on wages and prices broadly in the same way that we saw a few years ago. Yeah, I think the recent data gives us confidence in that to some extent. This softness in the labor market is acting, as you said, as an obstacle to those second round effects developing. We can also see that in business survey data, for example, the Bank of England's Survey of Chief Financial Officers that they conduct on a monthly basis of 2000 CFOs. So it's quite an extensive survey overall. Bear wage expectations for the year ahead of held steady since the conflict. So at around three and a half percent or so, and that's not too far away from the rate that's likely consistent with inflation returning to the 2 percent target over the medium term. I suppose the caveat around this is that some of those second round effects, if they were to develop

17:03are going to be slow to materialized around wage settlements in particular. So we know we've got some confidence from wage expectations that some of those wage settlements into 2027 as a risk that we could reflect some of that upward pressure. There's not much evidence of that happening at the moment, although the data that the Bank of England has around wage settlements for next year is still quite sparse at present. So overall, yeah, we can have some reassurance from what we're seeing around potential second round effects. We have to keep in mind that it could be quite slow to develop overall. And as Andrew said, the longer that energy prices remain elevated, greater the risk that those factors were persistent, durable, and flash-free pressures eventually take home. I guess the problem I have with all of this is that it's sensible to have oil prices gradually come back in for various reasons that we don't need to go into. But I would a bit concern that we might find ourselves in a different situation and we are finding ourselves to slightly

18:07different situations. So the events of the last few weeks show it to us that actually there are risks, these kinds of material, I said keep oil priced up for some time. The HOTE development was quite unexpected. European gas prices have also been rising. It's not just oil. TTF, we are recording on the 15th September TTF gas prices. I just looked at them about 79 euros per megawatt hour. That's quite high. And the UK is quite dependent on gas as much as it is on oil. And going into the winter season with gas prices elevated, regulated changes to regulated energy prices around the corner. I'm just concerned that we will get another inflationary shock from energy. And then we're likely to see some sort of continued upward pressure on food prices because of the extreme weather conditions we've had in Europe this year and also super-elidium. So I'm just a sanguine about this. I feel like food and energy could lead to a bit more inflationary pressure. That could also then transmit,

19:11will transmit to goods and services. I don't know to the extent to which to look, actually transmit to wages. I'll give you that. That feels to be a weaker lick. But to see headlight inflation stay elevated for some time, that feels like a distinct possibility. So I'm just sort of pushing back a bit and wondering to what extent should we be concerned about headlight inflation stay elevated for a bit longer. Well, the natural gas channel that you spoke about is significant risk given the U.K.s dependence on that and the way it feeds through into the energy regulators cap. So as things stand at the moment, if natural gas prices remain around their current level rise further, we should see another quite significant increase in the rice cap in January, which as I mentioned before, would likely raise the inflation profile slightly higher than we have at the present time. So it would remain a bit more elevated into early 2020, 27 at least, and we currently have it if events evolve in that way. Maybe you could help unlistness out of it here David and break down inflation a bit more.

20:14You've got sort of core inflation and then you've got headlight inflation, non-core being food and energy largely. So could you give us a sense of where inflation stands right now in the contribution of food and energy to? So headlight measure is 2.9 percent. And the core measure is somewhat lower 2.6 percent, where it's been for three consecutive months. Within that, series is inflation 3.4 percent, but it has decelerated through the first half of the year. So by standards of recent years, 3.4 percent is certainly moderate compared to recent standards, also relatively elevated overall. Core goods is more like 1 percent, so that's like non-industrial goods and food price inflation has been decelerating and is I think around 1.5 percent. And the food price inflation has certainly been, no, it's a downside, surprised with the first half of the year as it has been another part of Europe. Though as we've said, that's unlikely

21:19to be sustained. There are good reasons to expect food price inflation to accelerate in the second half of the year and perhaps into next year as well, given the other factors with this cost of energy prices and transportation. But that's an interesting point, because farm gate prices in Europe, that's food prices at the farm. They've been falling over the last few months. So you're saying it's a similar phenomenon over here in the UK? That's slightly to be one contributing factor. Yeah. So fertiliser costs have not really fed in food prices yet. I think that's more of a slow bar on issue that we would be thinking about into later this year and into 2027. So that's definitely one of the factors that I said helps to drive the forecast for food price inflation upwards through the second half of the year. And that is I say contributes to their expectation that headline inflation rises somewhat far different where it is at present. So to drive home the point we made repeatedly over the last few

22:20months, the inflation situation right now is quite different. The situation that prevailed back in 2223. You're saying food and energy basically makes up, I don't know about 30 basis points, so the 2.9% headline, roughly, and actually you've got a negative contribution from food. And so it all, what really needs to happen now is for energy prices to come back tired and this will prove to be a very transitory phenomenon, not needing much monetary policy tightening, which is great to hear. But before we talk about monetary policy tightening, maybe I want to pick up on what Andrew was talking about with regards to the labour market, the size of softness in the labour market. So that could undo the consumer, right? If the softness becomes something bigger, then that could actually undo some of the positives you've seen from consumption. Yeah, I think that's an important point. And definitely when we're talking about headwinds and threats on their rise and earlier, I think the ongoing weakness of the labour market is definitely

23:23one of them. When we consider that a lot of the economies continued resilience has been driven by consumers spending, I think we can obviously see that consumers have been willing and able to draw down their savings to cushion the hit to real disposable incomes from the jump in energy prices. But to have to assume that that's not something that can continue forever, particularly when, you know, as I mentioned, employment seemingly is continuing to decline wage growth as a slowed. And that means in real terms, wages are, they are still rising just about, but again, the real growth rate of wages has slowed even more sharply. So it is, you know, if this situation continues the labour market remains, we can does become increasingly difficult to see how consumer spending can continue to grow at such a solid cliff as we've been seeing so far this year. Which leaves the back of England in a bit of a difficult position? I'm sure thinking about the

24:24weakness in the labour market, the economic cycle and recovering consumer, but on the other hand, the possibility of rising inflation because of the risks of the horizon. David, let's make you governor for the day. We are recording this episode two days before the meeting. We'll release it a day before the next monetary policy meeting. So let's make you governor for the day. What are you going to do? Well, I think the meeting as a time, but it's a relatively clear card decision to keep rates on hold. So what we've seen over recent weeks, certainly since the July meeting is a tightening financial conditions. And that's helpful to the Bank of England in the TITS, imparting some disinflationary pressure. We've seen that through in to say higher mortgage rates, for example. So it's constraining demand elsewhere in the economy in the housing market, for example. And the other factor that we can take some reassurance from is the inflation data that we've discussed so far was seeing some continue slowdown in services inflation, so reflecting domestic

25:27price pressures, the part that the Bank of England has greatly greatest influence over. And we've also already discussed around those potential second round effects and prices and wages. The survey data suggests an absence of those developing. The contrary argument through that would be that a timely rate rise would build some insurance against upside inflation risks, and it would also guard against the risk that some of the recent tightening and financial conditions that we've seen unravels. Because obviously the tightening and financial conditions is reflecting the market expectation that the Bank of England will implement rate rises and follow through on them. The other factor, though, that supports a rate hold in September is the budget that is looming at the end of October. If the Bank of England instead holds this month, they will have the opportunity in November instead to assess the implications for inflation resulting from the budget and to consider the policy stance in November as a result of that.

26:33So I think the overall shape of the circumstances going into this meeting is around what we've seen around inflation, the survey data, the tightening and financial conditions, the budget that's ahead. It makes a rate hold sensible this month. So you would agree with that. A rate hold would be sensible. Do you think that an increase would be a mistake? No, it wouldn't be a mistake necessarily, but I think there's not necessarily the urgency presently at this meeting to follow through on that. Of course, we've seen the rise in energy prices, which does strengthen the argument and the minority will make that a timely rate rise would build some insurance against those upside risks. The other factors that I've mentioned previously also support the case for keeping an unchanged rate stance this month, particularly the uncertainty still exists around energy prices are going to evolve and the uncertainty that's going to emerge from the budget. Now, over the course of the last couple of years, we've had a consistent

27:35disconnect between what people like us, i.e. economists, what we think the long run rate of interest should be and what markets think the long run rate of interest should be. Of course, you can't really tell what the markets think about the long run rate of interest, but looking at interest rates further out, there's always been a disconnect between the market view of interest rates three years time, any kind of this views of interest rate three years time. So by this I mean the policy interest rate that is still the case and in fact, I think it's recently become a bit worse. Do you think economists are wrong and the markets rate? Well, at least today you could say that the bank of English action is through this year, I've conformed to our baseline expectation. I think the baseline expectation of most economists, certainly, after the immediate outbreak of the conflict, which was that the bank of England would keep rates on hold, you think back to the spring, the market expectation was that the bank of England would already have raised rates by this point in time. Of course, it's not necessarily going to remain the case, we talked about the risks

28:39around the outlook for inflation, which could eventually trigger a rate rise later in this year. If we get a more of the interest situation for the outlook for energy prices is more elevated in a prolonged basis. The thing about market expectations of why do they price in even up to five rises almost by the end of next year? Possibly it's the experience of recent years where the UK has been more susceptible to inflationary pressures than elsewhere in the euro zone, for example, reflecting the situation in the labour market that caused inflationary pressures to be more sticky. That's maybe one area where we disagree with financial markets assessment around how susceptible the UK economy has to durable inflationary pressure. You think this is something more than a bit of a hissy fit. We've got a bit of a pick-up in energy prices and markets are responding immediately by expecting very sharp rate increases, but that doesn't really translate into the underlying economic conditions, so we should look

29:43through it. It should look through the noise. We've seen certainly a lot of volatility in financial market expectations since the conflict. If you look at the expectations for the policy rate by the end of next year, they varied somewhere between, but they expected one rate increased back in the summer as the memorandum of understanding came into place and risks diminished. That compares to three rate rises expected in the spring and the four almost five rate rises to expectate at the moment. So our expectations are highly sensitive to the conflict as evolved and the spot price in energy prices, whereas I think our assessment is made more stable over that period in expecting rates to remain unchanged, albeit we see a risk of a rate rise further ahead. Yeah, there are definitely worth acknowledging market rate expectations are always volatile, and in particular right now, as David mentions,

30:43they do seem to be moving almost, I think, one for one with what's happening in global energy markets. You can also point to the point we've discussed before I think the disconnect between a point forecast like we would have in our baseline, we have a baseline scenario and then a range of other alternative scenarios, whereas if you're looking at market pricing, that's more akin to a weighted average of all possible outcomes, so they're not necessarily comparable. And I guess it's just speaking to the fact that the risks to the rate outlook, the risks to our baseline forecast, I think we would definitely acknowledge our clearly to the upside now. But yeah, in terms of what the bank England is going to do, I think it is it's harder to argue now that a rate hike at some point would be a big mistake. There's clearly potential advantages there in terms of the sort of risk management, but I do still think it would be a mistake for the bank of England to embark on

31:48a sort of wholesale tightening cycle as markets currently seem to be pricing in, unless we do get very clear evidence of an upturn in core inflation wage growth starting to re-excelerate. And yeah, as we've mentioned, there isn't yet any sign of that. I wondered to what extent this is just influenced by this global repressing that's going on right now. It's not just the UK where we are seeing a sharp increase in short term policy rate expectations. This is happening in other parts of the world in the US, in the Eurozone. It's also what you were talking about David, this tightening of financial conditions, I guess what you really mean by that is that a whole bunch of industries have got up. And that's right across the maturity structure, it's right across product industries have just got up. So I wonder to what extent this is all a global phenomenon, not just the UK one. Well, we've certainly seen that in obviously the Eurozone as well in Germany, seeing sharp increases in their long-term borrowing costs by their standards have seen it in the US

32:50too. So as you said, as a global phenomenon reflecting the drivers of that, which is the perception of the more inflationary backdrop and outlook and the expectation of central banks responding to that. But to break that down a little more, you've got an increase in short term rate expectations that's driving up the short end of the curve and that's transmitting across to the longer end of the curve. So by the 10-year bond deal, you could think of that as reflecting short term rate expectations, but also longer term inflation expectations, which I guess is part of the short term rate expectations. And then term premium, and we'll be talking a bit about the possibility of some risk premium being attached to different long-term bonds. Do you see that in the UK? What do you think is going on? I think if you look at the increase in government bond yields, we've seen over the past, like since the start of this year, certainly a good chunk of it is probably driven by what people call the term premium, as you say. I think we

33:55don't generally have a sort of widely accepted, reliable estimate for UK government bonds of the breakdown there, but people often point to well-known breakdowns for US treasuries. And I think it's generally a reasonable assumption if the US estimated term premium is rising sharply, that's likely to be true for other comparable developed market government bonds as well. But yeah, I mean, and there's no shortage of potential factors you can point to in potentially sort of driving up that term premium, that uncertainty premium, if you like, whether it's simply uncertainty over the future path of policy rates over the future path of inflation, where, obviously, also in a world of perhaps ever increasing concerns over fiscal policy and government debt burdens, of course, the UK is absolutely one of the sort of countries in focus there in terms of the public finances looking particularly precarious. But yeah, I think if you

34:59look at the numbers and comparing what's happened in the UK to elsewhere, I don't think there's much evidence to suggest that the recent moves have been particularly driven by concerns over UK fiscal policy. Certainly, it does seem to be mostly just explained by an upward reassessment of the path of short-term policy rates, maybe, in part, feeding through to people expecting short-term rates to remain higher in the medium to long-term as well. And yeah, that seems to mostly be a pretty global phenomenon rather than a UK-specific one. The rise of interest rates, however, does not make the job of eight chart-slope extreca, any easier, particularly not a chart-slope that faces dwindling headroom and we've got a budget coming up. We've been talking about this for a while, let me think, that actually any new budget presented, and the new budget presented in the autumn is not going to contain many new surprises. It's very unlikely that we'll see big tax increases,

36:03even less likely that we'll see massive borrowing, just above to that. Well, the rise in boring clock causes clearly adding to the pressure facing the chancellor and the run-up to the budget. So back in the spring, the official estimate at the time was that the government had around 24 billion of headroom around their fiscal target, which is essentially to bring the budget into balance by the end of the decade. And the rise in borrowing costs and other factors has likely eroded most of that headroom. It's difficult to be converting the exact estimates, but we can be converting, saying most of it has likely been eroded. Our baseline expectation around that for the budget is that the chancellor will seek to at least restore headroom to where it was at the start of the year, and that will likely require tax rise in double digits. So working assumption at the moment is that to rebuild headroom to where

37:04it was earlier this year will require tax rises of around 15 billion or so. But that in context, it would be a smaller tax right raising budget than we saw last year when the equivalent amount was around 25 billion and the year before was around 40 billion. So at least shaping up to be somewhat smaller, there was clearly not the possession that the government wanted to find themselves in yet again. So that's clearly small potatoes. What about borrowing, do you think the government will launch a new borrowing program or an unfunded borrowing program? That seems very unlikely. After all, Chancellor's committed to fiscal discipline and markets are very forgiving. I'd say that these in terms of the tax rises, the implications of that are not significant for the economic outlook in terms of GDP growth. So it doesn't materially change our GDP growth forecast compared to where we were earlier this year. But 15 billion is still ahead for the chance of

38:05the in terms of where he's going to have to find that because they're working assumption around that is they'll keep their promises not to increase the main taxes, which account for about 60% of revenues. So once again in the position of having to put together a package of smaller tax raising measures and that's not necessarily going to be easy to do. Yes, I was approaching the problem from the other side. I think what's the possibility that the Chancellor decides to launch a big borrowy expiry in order to boost growth in the economy, etc. Do you think that's likely? No, we wouldn't expect that. That would be a surprise for us. They did previously loosen the fiscal rules a couple of years ago to allow for more borrowing and given the situation in financial markets around the UK borrowing course, a Chancellor really doesn't have much room to do that at all. So all in all, we expect very little from the budget. It's not going to move the dial battery, economically speaking. And it's very unlikely that the Chancellor will do anything

39:08unto it, but it comes to fiscal discipline. It was certainly not risked our natural markets. I think we've seen in recent weeks that the new Chancellor is reinforcing that message around the government's commitment to the fiscal targets and fiscal discipline, given some of the previous skepticism that markets had around the new prime minister of the Chancellor's really reinforcing the opposite message on that. Well, let's leave it there. Thanks so much David for joining us and giving us a view of the UK thanks Andrew for helping this discussion along. And thank you of course to our listeners. You've been listening to the Global Economy AdWraft.