Shock-proofing the UK economy

Rather than view recent market volatility negatively, the government has a chance to frame it as a moment to improve public understanding of what it is doing

- Mohamed A. El-Erian President, Queens' College, University of Cambridge, & professor, Wharton School, University of Pennsylvania

The British government was right to describe the recent bout of market volatility in the United Kingdom as having been fueled principally by "global factors"—in particular, a sharp rise in US bond yields. It was also right in touting how well UK markets have coped with the turmoil. But no one should downplay the additional challenges the UK economy will confront in the months ahead, the structural weaknesses that are compounding its vulnerability, or the policy action that is urgently needed.

The recent surge in US yields has three main causes: a string of data releases indicating that actual and potential economic growth are outpacing consensus estimates, higher-than-projected inflation (together with a meaningful rise in consumers' inflation expectations), and increased market sensitivity to the bond issuance that comes with large deficits and debt. Given that advanced economies compete for funding from global investors, it should be no surprise that higher US yields caused borrowing costs in most other countries to rise as well.