Matthew Lynn

Bond yields are soaring to their highest levels in almost 30 years and sterling is sliding. The government’s economic strategy is facing its first real test, and where is the chancellor? So far Rachel Reeves has been silent, preparing for a jaunt to China. At some point she will have to address the markets – or risk turning a round of jitters into a full-blown crisis. Over the last few days, the markets have turned decisively on the UK. Yesterday, the yield on 10-year gilts hit its highest level since the financial crisis of 2008, while the yield on the 30-year gilt hit the highest level for 30 years. The UK is now paying more to service its debt than Greece, and very soon that will mean rising mortgage rates, and more companies going bankrupt.

When the British government spent £400 million on the satellite internet start-up OneWeb back in 2020, it was seen as precisely the kind of active, tech-led industrial strategy that could re-boot the British economy. There were hopes the deal would help secure a place for the UK at the heart of the emerging space economy. Then prime minister Boris Johnson saw it as a key part of launching ‘Galactic Britain’. But four years on, the taxpayer is on the hook for a £300 million paper loss after shares in OneWeb's parent company sank to a record low. The money poured into OneWeb has proved to be remarkably poor value Even by the standards of government investment, the money poured into OneWeb has proved to be remarkably poor value.

A few journalists have pointed it out. So have some Conservative and Reform MPs, think tanks and one or two of the City banks. Now, it is official: the Bank of England (BofE) has warned that Chancellor Rachel Reeves's October Budget has caused Britain's economy to stagnate. The real question now is when will the pressure on Reeves to reverse some of the measures in her catastrophically misjudged Budget become so intense that she has to give in? For a central Bank, the language was about as harsh as it gets. In its latest assessment of the economy, while keeping interest rates on hold, the BoE argued that businesses were reacting to the Budget with 'lower headcount, hours, and pay and higher prices than otherwise'. It downgraded its forecast for the current quarter from a 0.

With job vacancies falling, and with GDP contracting, the Chancellor Rachel Reeves might have assumed that her final week before Christmas could not get any worse. Unfortunately, she will have been disappointed. We learned today that inflation is now rising sharply again, with the Office For National Statistics reporting that the rate has risen to 2.6 per cent – the highest level for eight months. The real problem, however, is this. It is going to get a lot worse over the next few months – and the Chancellor will only have herself to blame.

There are, in fairness, plenty of reasons why the City might be reluctant to embrace the Chinese fast-fashion giant Shein. Its disposable fashion ravages the environment; it encourages rampant consumerism; it has admitted to finding child labour in its supply chain. Here’s the problem, however. The London stock market is in such a dire state that it can no longer afford to be picky - and if it turns this one down it will condemn itself to irrelevance.  According to reports today, the Financial Conduct Authority is taking longer than usual to approve Shein’s IPO in London, and it is looking into its supply chain after an advocacy group for China's Uyghur population questioned whether it met the standards the City is meant to apply to companies floating their shares.

The economy would crash, the markets would be in open revolt, and he would swiftly be evicted from office by the IMF, and replaced by some ‘grown-ups’. When Argentina elected its chainsaw-wielding, libertarian President Javier Milei a year ago, the economic and political establishment confidently predicted he would only last a few weeks. And yet, not only has Milei managed to stay in power, all the evidence suggests that he is turning Argentina around. The real question now is this? Will a stagnant and moribund Europe pay attention? With inflation running at 25 per cent a month, with the largest IMF loan in history to pay back, and with the currency in freefall, the Argentina that Milei took over had become synonymous with mismanagement and decline.

The power probably feels good. And it may help her win the presidency eventually. Even so, there is a catch to Marine Le Pen's decision to bring down Michel Barnier's government in France, potentially as soon as tomorrow afternoon. If the government goes, the eurozone ay well go down with it. The financial plans of Le Pen's National Rally's (NR) party are completely reckless. And even if the chaos that will follow the vote does help win the Élysée Palace for Le Pen, she will inherit a ruined economy – for which she will only have herself to blame.

For the first time ever, France’s borrowing costs have risen above those of Greece. As of today, the bond markets have decided that French debt is a riskier bet than Greece, the country that 15 years ago almost crashed the entire euro-zone with its fiscal extravagance and irresponsibility. True, to some degree that reflects an improvement in Greece’s position, as well as the decline of France’s. Yet the harsh reality is this: France is in a sorry state and president Emmanuel Macron will struggle to patch things up. The bond markets have decided that French debt is a riskier bet than Greece This moment of crisis was bound to happen eventually.

It turns out it wasn’t just China after all. Mexico, and indeed Canada, are just as much in the firing line. President-Elect Trump announced last night that he will impose an immediate 25 per cent tariff on imports from both of the US’s two largest land neighbours, threatening huge disruption to their economies. Trump may think he is being clever by weaponising access to the American market, and in the short-term he may even by right. The trouble is, he is going to break the global trading system – and it will be very hard to put back together afterwards.  This is a recipe for constant market chaos It is no surprise that the Canadian and Mexican markets are falling sharply today.

Rachel Reeves was probably expecting to be cheered for restoring 'stability', for rebooting 'growth' and crafting a British version of Bidenomics to create ‘the industries of the future’. Instead, the Chancellor’s 'fireside chat' at the Confederation of British Industry (CBI) conference today is likely to be rather uncomfortable. There probably won’t be any heckling, walk-outs, boos and cat-calls. Yet the business world has made it all-too-clear that Reeves's Budget will hit both jobs and growth hard. Reeves is going to get a rough ride this afternoon – and deservedly so. Labour's relationship with business is now broken beyond repair The CBI made it clear this morning what it thinks of Reeves’s Budget.

If it came from Nigel Farage no one would be very surprised. Or from one of the band of German professors who launched the far-right AfD party. But the latest warning of a fresh crisis in the eurozone comes from a far more unexpected source: the European Central Bank (ECB). In its financial stability review published today, the ECB warns that the single currency could soon be plunged into a replay of the trauma of 2011 and 2012. Unfortunately, it is almost certainly right.  The review, published twice a year, is intended to warn the markets of impending risks to the system. Today’s update explores a familiar cocktail of risks, from the potential for a bubble in AI stocks to the danger that the return of tariffs might pose to the trading system.

It may well be the biggest and most significant choice the Starmer administration will have to take. If Donald Trump decides to impose huge tariffs on China, potentially sparking a global trade war, the UK will have to decide whether it backs America, or tries to steer a softer path with the European Union. All the indications are that it will choose Europe. The trouble is, that will prove a huge mistake – the British economy is very different from the rest of Europe, and we will be thrown overboard as soon as it is convenient.  The contrast has ground to a halt, and it makes little sense to tie yourself to a failing bloc Trump is not a man who is bothered by consistency.

Business taxes are soaring. Employment rights have been massively extended, the trade unions are getting more powers, companies are too dependent on low-skilled immigrants, and the planning system still makes it impossible to build anything. There are plenty of challenges facing the British economy that the Governor of the Bank of England Andrew Bailey could have drawn attention to in his Mansion House speech last night. And yet, instead he decided to reopen the Brexit debate. That was surely a mistake. There are two big problems with Bailey’s decision to reopen that can of worms Addressing the City alongside the Chancellor Rachel Reeves on Thursday, Bailey argued that relations with the European Union were crucial to getting the British economy moving again.

Perhaps he will walk through the lobby of the Pentagon with a kitchen sink. Or fire the entire IT department at the Fed, shift the IRS to Mars, while replacing traffic police with fully autonomous Tesla robo-cops. No one has any real idea yet what Elon Musk, the entrepreneur behind Tesla and SpaceX, might come up with now he has been appointed by Donald Trump to head up a new Department of Government Efficiency (or ‘Doge’). One point is certain, however. There will be some spectacular fireworks. And it will throw down a challenge to bloated governments everywhere.