Will the rapid normalisation of POS and digital wallets make banknotes a thing of the past? Not so easily, claims another study from the Official Monetary and Financial Institutions Forum (OMFIF), as per which, digital payment ecosystem is useful till the presence of electricity, connectivity, and authentication servers. If one among them goes down, or all the three go down together, physical cash becomes the last line of defence.

The April 2025 blackout on the Iberian Peninsula (continental Spain and Portugal), in which the power grid collapsed and telecommunications faltered, entire regions found themselves suddenly cut off from the digital economy. Payment cards did not work. Mobile wallets froze. Online banking was inaccessible. Merchants could not connect to networks. People with ample digital balances were unable to purchase food or fuel. Only those who carried physical banknotes retained economic agency.

Cash is king, but has its weakness

A well-designed monetary ecosystem always treats both physical cash and digital money complementary to each other. While the POS and digital wallets serve the tech-savvy sections of the populations, cash ensures that the elderly, the digitally excluded, unbanked communities, informal workers, and those concerned about privacy still to participate in the digital economy.

Private digital payments provide speed and convenience. CBDCs may provide a modern, stable form of public digital money. But only cash provides a non-digital layer that can sustain economic activity during severe disruptions. It is the monetary equivalent of an emergency generator.

However, physical banknotes also have their share of vulnerabilities, and the prominent among them is counterfeiting. We are talking about the illegal act of creating, copying, or imitating a physical currency, that if left unchecked, can undermine national economies, apart from weakening financial institutions and jeopardising people’s livelihoods.

The introduction of unauthorised, counterfeited money artificially increases the currency supply, which in turn devalues legitimate currency, leading to higher prices and inflation. Individuals and businesses unknowingly accepting counterfeit bills suffer immediate and unrecoverable financial losses, as these notes get confiscated by banks without reimbursement. If the volume of fake cash reaches a critical mass, it lowers the faith among people on the utility of paper money entirely, threatening its function as a medium of exchange and a store of value.

In August 2025, under Europol’s watch, a joint law enforcement operation intercepted the distribution of counterfeit currency through postal services. Nearly one million items got confiscated, including fake euros, US dollars, and British pounds, with an estimated value of over EUR 66 million.

The collaboration between authorities from 18 countries also triggered 102 new investigations targeting criminal networks engaged in currency counterfeiting. Led by Austria, Portugal and Spain, the probe was conducted between October 2024 and March 2025, and uncovered several criminal networks engaged in currency counterfeiting. Most of these networks were operating from outside the EU (European Union), mainly from Asia, but also from America and the Middle East.

Central banks vs counterfeiters

In March 2026, the Swiss National Bank unveiled the new-look Swiss franc banknote designs, featuring native plants, landscapes, and how human life adapts at different altitudes throughout the Alpine nation. The central monetary authority has also utilised a revolutionary three-layer substrate called Durasafe in the next-generation notes, which sandwiches a polymer layer between two outer layers of cotton paper.

This unique base, combined with over 20 advanced security features, makes counterfeiting nearly impossible. The notes have also embedded fibres and security numbers that glow when viewed under UV light, and sections that disappear under infrared light.

Another very good case study has been Singaporean banknotes, that use a blend of advanced physical substrates, intaglio printing, and optically variable devices (OVDs) to prevent counterfeiting. Lower denominations get printed on durable polymer, while higher denominations utilise specialised paper. Genuine notes feature a metallic, reflective kinogram. When tilted, the denomination numeral shifts, and the MAS (Monetary Authority of Singapore) logo transforms into the Singapore lion symbol.

Polymer-made lower denominations also feature an embedded metallic thread, while paper notes utilise an interwoven thread. When held to light, holographic images of the Singapore Lion symbol and MAS logo become visible on the thread.

The MAS logo itself has been printed in a micro-lettering format, which ‘ will be difficult to figure out without a magnifying glass. Specific elements like the serial numbers, chairman’s seal, latent image patches, and denomination numerals have been kept UV-friendly, emitting a bright, distinct glow.

The Bank of England’s proposed new banknote designs, despite being controversial for leaving out historical figures, will be having intricate wildlife photos like bird flapping its winds or a deer running, that in the words of the central bank, will be combined with latest security technologies to prevent counterfeiting.

United States, to commemorate its 250th anniversary, will be launching its ‘Catalyst’ series of redesigned $10 currency, that will incorporate advanced visible and covert machine-readable security features to combat counterfeiting. These new notes will incorporate advanced security features commonly deployed in other developed economies, but never used in US currency. Features like enhanced optically variable devices, sophisticated watermarking techniques, and critically, machine-readable elements specifically designed for high-speed automated authentication.

Keeping in mind the counterfeiters’ shift to generative AI to replicate microprinting and watermark patterns with increasing accuracy, the Catalyst redesign will also be introducing security elements that current counterfeiting technology cannot reproduce.

While central banks are bringing more complex security features like polymer substrates, 3D ribbons, and colour-shifting inks, counterfeiters are adapting as well against these security advancements. They are reportedly using advanced flatbed scanners paired with layer-based graphic software (like altered versions of Photoshop) to isolate, sharpen, and reconstruct complex banknote graphics layer by layer.

Using high-end commercial digital printers, these ‘notes’ are getting reproduced, with ‘fine lines and micro-text’. Counterfeiters are also using chemical solutions to strip the ink off low-value banknotes (such as $1 or $5 bills), followed by the reprinting of higher denominations ($50 or $100) on the original, authentic paper, effectively bypassing security pens and texture tests.

Forgers are even mimicking the extreme-pressure intaglio presses on the notes, by utilising fine-tip glue pens, or selectively applying clear matte lacquer sprays over portraits and text. Makeup kits, specifically eyeshadow and nail polishes, are being used to replicate expensive Optically Variable Ink (OVI), or colour-shifting 3D ribbons.

Last but not the least; to create the security threads, some criminals split thin paper sheets in half, before manually placing a simulated plastic or UV-ink strip inside, and gluing the layers back together.

Making the banknotes secure

Modern-day banknotes are being made from synthetic polymer materials like biaxially oriented polypropylene (BOPP). As compared to paper banknotes, they last significantly longer, have less environmental impact, reduced cost of production and replacement, and, most importantly, more than enough room for inducting abundant security features.

It was the Reserve Bank of Australia (RBA), Commonwealth Scientific and Industrial Research Organisation (CSIRO), and The University of Melbourne, that first innovated and issued the new breed of currency in Australia during 1988. By 1996, Australia switched its physical dollar to polymer banknotes.
Romania was the first country in Europe to issue a plastic note in 1999, and became the third country, after Australia and New Zealand, to fully convert to polymer by 2003.

Polymer banknotes usually have three levels of security. Primary security levels are easily recognisable by consumers, and may include intaglio, metal strips, holograms, and the clear areas of the banknote. Secondary security features are detectable by a machine. Tertiary security features may only be detectable by the issuing authority when a banknote is returned.

Next comes watermarks, one of the basic features to ensure banknotes’ effective documentation and protection for centuries. They are extremely difficult to replicate, as slight deviations in the portrait, or in the motif, raise suspicion in the minds of people and authorities alike.

When it comes making watermarks an iconic shield of defence against the counterfeiters, German company Giesecke+Devrient GmbH, that operates in the fields of digital security, financial platforms, and currency technology, has become a known name. It has developed an array of watermark designs like multitone, highlight and pixel, each of which has a distinct appearance.

These watermarks, if linked together on a banknote, create unambiguous and memorable motifs. Watermark designs often get amplified in printed and applied security features, further helping simplify the currency’s authentication process.

Next, we have ‘Security Thread’, a polymer-based stripe incorporated into banknotes during the papermaking process. The concept came into the picture during the mid-1800s when legendary American papermaker Crane and Co. introduced silk security threads.

In 1940s, the Bank of England wrote a new chapter in banknotes’ security, by proposing metallic threads for shilling banknotes. Since then, security threads have become a widely used authentication method.

Today, more than 90% of banknotes contain security threads, and their design has only become more sophisticated over the years, featuring microtexts, holograms, colour-changing effects, and UV luminosity.

Depending on their location in the paper, security threads can be of three types: Latent (completely embedded within the paper substrate), Diving (thread that weaves in and out, creating a dotted line on the banknote’s surface), and Figure (thread that appears as a series of shaped windows but forms a solid line when viewed in transmitted light). Threads can be of metal without text, metal with microtext, semi-transparent with text, holographic, colour changing, or luminescent under UV light.

Threads also carry magnetic properties, which are detectable by specialised devices with magneto-optical sensors. There can also be floating images in these security threads, that creates a motion effect (when the note is tilted, the image appears to move or shift). Every security thread comes with a dynamic effect, that produces motion, shifting, or transformation when the banknote is tilted or moved.

The devil lies in the details

Microprinting is a powerful anti-counterfeiting security feature that consists of incredibly tiny text (usually 0.15 to 0.3 mm high) printed onto banknotes. To the naked eye, the microprint appears as a solid, continuous thin line, but if seen under a magnifying glass, it reveals clear, legible words or numbers. Because of the feature’s microscopic size, counterfeiters using standard photocopiers or scanners cannot reproduce the fine details, and end up producing a text that usually translates into a blurred or solid line.

Central banks use either of positive microprinting (dark letters on a light background) or negative microprinting (light letters on a dark background). You will find some of the best use cases of microprinting in any prominent currency.

Next is ‘Intaglio Printing’, a security printing technique where designs get engraved into metal plates. Thick ink fills the recessed grooves, and immense pressure transfers it onto the paper, creating a thick, raised, and highly tactile texture. Here, Giesecke+Devrient has redefined the game through its ‘FIT System’, a combination of computerised engraving and laser technology that enables the realisation not only of very fine lines, but also translucent, multi-tonal structures that create new colours.

The element is embedded directly into the intaglio master by means of high-resolution laser engraving, and then embossed onto a reflective metal patch of the banknote paper. Three-dimensional structures are reproduced to an exceptional level of quality. The precise engineering guarantees that originals remain unique, whilst each reprint is identical to the base stock.

Another impact player is colour-shifting ink. Also known as Optically Variable Ink (OVI), the mechanism is a premium anti-counterfeiting measure that is used on modern banknotes. When you tilt the bill, the ink displays two distinctly different colours depending on your viewing angle, making it an incredibly reliable, naked-eye security feature.

The ink contains specialized metallic or magnetic flakes that bend and reflect light differently at various angles. Held flat, the ink on the note may appear green. Tilted, it shifts to blue, gold, or copper, depending on the specific currency and denomination.

Currency meets technology

Central banks are already thinking about the future. Digital and smart authentication of banknotes will be the next method to watch out for, as the procedure will be integrated into advanced cryptography, digital watermarks, machine-readable codes, and smartphone-based AI models to verify currency, deter counterfeiting, and bridge physical cash with digital financial ecosystems.

German technology company AUGENTIC and Orell Fussli Limited Security Printing have prepared a solution called ‘Smart Banknote CBDC’, that combines Orell Fussli’s highly secure banknotes with AUGENTIC’s ‘CBDC Platform’, including trustwise.io Distributed Ledger Technology.

Smart banknotes emerging from this ecosystem can be exchanged like traditional banknotes, apart from being converted into digital cash at any given time. This happens by using encrypted, anti-copied 2D barcodes for authentication purposes via smartphone. All processes are secured by DLT in combination with smart contracts.

Central banks and tech developers are also utilising consumer smartphones to verify currency. By using built-in cameras, infrared sensors, and advanced machine learning models, mobile apps can analyse banknote fingerprints, micro-printing, and edge transitions to confirm if a note is genuine with near-perfect accuracy.

Digital watermarks and machine-readable features, in the coming days, will allow banknotes to get printed with covert data, like specific magnetic signatures and invisible infrared patterns. Scanners, photocopiers, and ATMs will be programmed to detect this digital data, actively preventing unauthorised reproduction, or verifying deposits in real-time.

And then, there is ‘Chaotic Element Fingerprinting’, a state-of-the-art system that analyses the natural, random distribution of security fibres embedded in the paper pulp of a banknote. When scanned with UV light, this pattern serves as a unique cryptographic fingerprint linked to the note’s serial number.

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While the United States President Donald Trump, announced the signing of the preliminary agreement between his country and Iran, details of the pact haven’t emerged yet. However, that hasn’t stopped global markets from entering the feel-good mode.

Investor attention will now shift to the upcoming central bank meetings, with the Bank of England (BoE) and the US Federal Reserve giving their takes on whether the Iran war’s conclusion (subject to the stability of the interim peace deal) has come too late to ease inflation concerns of the British and American economies.

With the Bank of Japan already raising its interest rates to a 31-year high, the focus will be on the monetary policy approaches of the BoE and Fed.

The Australian dollar, on the other hand, was down 0.3% at USD 0.705, holding to its losses ‌as the ⁠Reserve Bank of Australia (RBA) left interest rates unchanged in a unanimous decision after three consecutive hikes even as inflation remains elevated.

Stating that the inflation rate (4.2%) was still too high, the RBA said it would do whatever was necessary to bring it down “including increasing the cash rate target further if required.”

Matt Simpson, a senior market analyst at StoneX, told Reuters that traders are not ‘buying’ the RBA’s mildly hawkish tone where the Australian dollar is concerned.

“Given soft employment and growth, the only reason it is hawkish at all is to not undo the work of the last three hikes,” Simpson said.

While the US-Iran interim peace agreement would extend the “ceasefire” already announced in April by another 60 days and reopen the strategically important Strait of Hormuz, the broader currency market’s reaction to the development was a constrained one. Now the comments of the central bank bosses will be keenly watched by the traders and investors.

The euro was at USD 1.1577, below the 10-day high of USD 1.1622 ⁠it touched on Monday. Sterling, on Tuesday, was last seen at USD 1.3392. The dollar index, which measures the US currency against six other units, was at 99.76.

Another question that the investors will seek a quick answer from is whether the global supply chain will get normalized, given the fact that the Hormuz closure since February 28 disrupted the energy trade to a large extent along with creating a price shock phenomenon.

As per the ING analysts, “the market reaction has been faster than realities on the ground, and it can be altered by the prospects of a deal.”

“A more durable repricing requires safe, predictable, and insured shipping through the Strait of Hormuz. And demand could likely be higher than usual as depleted reserves need to be replenished. Re-escalation risks are reduced, but not off the table,” they remarked in their market note.

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“There’s a lot of risk out there and yet asset prices are at all-time highs,” she said, BBC reported. “We expect there will be an adjustment at some point.”

“The thing that really keeps me awake at night is the likelihood of a number of risks crystallising at the same time — a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust — what happens in that environment and are we prepared for it?” Breeden said during the interview.

Since the US and Israel began joint strikes on Iran late February, global equity markets have been volatile, but still trading near record highs, with New York’s S&P 500 and Nasdaq Composite closing at new all-time highs recently and global stocks clawing back from Iran war losses. The MSCI World ex-US index, which tracks large and mid-cap stocks listed across more than 20 developed markets, is up more than 5% so far in 2012, and has also rebounded from the Iran war losses.

Breeden also pointed to problems in private credit , where mounting defaults have drawn criticism and concern from market watchers.

“Private credit has gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years. It hasn’t been tested at this scale with the degree of complexity and interconnections it has with the rest of the financial system so far,” Breeden said. “It’s a private credit crunch, rather than a banking-driven credit crunch, that we’re worried about.”

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The Annual Report, published in a new format for the first time this year, includes a foreword by FSB Chair Andrew Bailey, who is also the Governor of the Bank of England. He said that in an increasingly fragmented and unpredictable world, where multilateralism is being tested, FSB members continued to find common ground and demonstrated commitment to addressing shared challenges, giving reason to be optimistic.

The FSB Chair notes that “the shocks of recent years have not undermined financial stability,” a testament to the reforms put in place since the global financial crisis.

Andrew Bailey also noted that the Financial Stability Board must continue to evolve to be fit for purpose in an ever-evolving world, a theme that will continue to guide the international body’s work. Also, the second phase of the Financial Stability Board strategic review of implementation will further address how to identify the causes of a slowdown in G20 reform implementation and how to encourage implementation more effectively.

As outlined in the body of the Annual Report, in 2025, the FSB, through its membership and in collaboration with international standard-setting bodies, continued to strengthen financial systems, enhance the resilience of global financial markets, and improve implementation of policy recommendations across industries and jurisdictions. Several longstanding vulnerabilities in the financial system during its ongoing surveillance, including rising sovereign debt levels and the rapid growth of Non-Banking Financial Institutions (NBFI).

In response, the Financial Stability Board completed work to address the financial stability risks related to leverage in NBFI and created the “Nonbank Data Task Force” to address data issues that prevent authorities from effectively assessing vulnerabilities in NBFI.

The FSB also reviewed the progress in implementing the 2023 global regulatory framework for crypto-assets and stablecoins, calling on authorities to address gaps and inconsistencies that could pose risks to financial stability. Regarding operational vulnerabilities, the FSB finalised an operational incident reporting exchange format.

The Financial Stability Board has emerged as the global standard setter for the resolution of financial institutions, and in 2025, it continued its work on this front to support authorities’ preparedness to respond to failures, including the production of policy guidance and enhancements to operational planning.

Image Credits: Bank of England

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Across global banking systems, artificial intelligence is moving from back-office optimisation to the heart of credit decision-making. The shift is subtle. There are no public announcements declaring that machines now approve mortgages. Yet increasingly, algorithms analyze income, spending patterns, behavioural signals, and even alternative data before a human ever sees an application.

So, the question is unavoidable: Are machines deciding who gets loans? And if so, what happens to human judgement?

The Quiet Expansion Of AI In Lending

Artificial intelligence is already deeply embedded in financial services.

“AI is transforming banking quite significantly, and the pace of adoption is fast,” Wahyu Jatmiko, Assistant Professor in Banking and Finance at the University of Southampton Business School, told International Finance.

He points to data from the Bank of England and Financial Conduct Authority showing that around 75% of UK financial institutions were using AI by 2024, up from 58% just two years earlier.

However, he explains, the heavy use remains concentrated in internal optimisation, cybersecurity and fraud detection. In underwriting specifically, adoption is more measured.

“Roughly around 15% of firms use AI directly in credit underwriting,” he estimates.

That figure may sound modest. But the deeper shift is structural.

“Even where it is not fully taking over, AI is increasingly embedded in the process,” Jatmiko says.

Instead of relying entirely on traditional credit bureau scores, systems now analyse real-time transaction data, behavioural patterns, and alternative datasets.

The result is not necessarily that machines approve all loans. Underwriting is becoming faster, more data-driven, and far more granular.

James Ekpa, an AI researcher at the Blockchain Technology Association for Black & Minority Ethnic Engineers (AFBE-UK), did not mince words.

“Yes, machines are increasingly deciding who gets loans today,” he told International Finance.

He sees a transformation from slow, manual processes to rapid, automated systems powered by machine learning algorithms.

Speed, consistency and scalability are among AI’s biggest advantages. Decisions can be made quickly. Models apply the given criteria uniformly. And, algorithms can analyse thousands of variables at a scale humans simply cannot match.

Efficiency, in other words, is no longer the differentiator. It is the baseline expectation.

Enhancement Or Replacement?

But, does faster mean better? And more importantly, does faster mean human judgement is fading?

“At the moment, I clearly see AI as enhancing human judgement rather than replacing it,” Jatmiko says.

He cites UK data suggesting that while about 55% of AI applications involve some automated decision-making, only around 2% are fully autonomous.

Creditworthiness, he argues, is not merely about predicting default probabilities. It involves context, borrower circumstances, regulatory constraints, and sometimes ethical considerations.

AI excels at analysing large datasets, document reading, income verification, and affordability calculations. In that sense, Jatmiko says, it acts like a powerful analyst. But final approvals, particularly for complex or high-value loans, still rest with humans.

Ekpa agrees that the human role is evolving rather than disappearing. Loan officers today increasingly review edge cases and borderline applications. They handle complex deals. They explain decisions to customers. They monitor model outputs and escalate anomalies.

The job is changing. It is becoming supervisory. That may be the real transformation.

When Context Meets Code

The limits of automation become clearer when qualitative factors enter the picture.

Jatmiko describes a hypothetical but realistic scenario: a small business reporting temporary losses due to a supply chain shock while holding strong long-term contracts. A human underwriter may interpret the broader narrative and take a forward-looking view. An algorithm trained primarily on historical default data might simply detect recent losses and flag high risk.

“There is research showing a mismatch between what AI models consider important and what human loan officers see as meaningful indicators of creditworthiness,” he explains.

Humans can contextualise. They can sometimes account for structural disadvantages when justified by circumstances. AI, by design, optimises patterns found in historical data. That difference is subtle. But in lending, subtle differences affect livelihoods.

The Question Of Bias

Advocates of AI argue that machines eliminate prejudice. Algorithms do not discriminate intentionally. They do not favour friends. They apply rules consistently. And that consistency is powerful.

But, consistency applied to flawed historical data can create new problems.

“AI can reduce certain types of human bias, but it can also embed and even amplify systemic bias,” Jatmiko explains.

If past lending patterns reflected unequal treatment of certain demographic groups, models trained on that data may internalise those patterns as objective signals of risk.

Ekpa echoes this concern. One of the primary risks, he notes, is bias amplification. If historical data contains discrimination, models may encode and intensify it.

Transparency is another issue. Complex models can be difficult to explain. Borrowers denied credit may receive little more than a generic explanation.

“Opacity raises regulatory and consumer trust concerns,” Ekpa warns.

Then there is model drift, when changing economic conditions gradually degrade model performance. Without continuous monitoring, systems may misprice risk during volatile periods.

In short, bias does not disappear. It changes form.

Accountability In An Algorithmic Age

If an AI-driven system denies a borrower unfairly, who is responsible? The answer is not always clear. Multiple actors are involved – AI manufacturers, developers, third-party providers, and lenders themselves.

However, both experts converge on one principle: accountability ultimately rests with the financial institution.

Ekpa says AI is a tool, not a legal entity. Financial institutions remain responsible for the models they deploy, the data they use, and the governance frameworks they maintain.

Jatmiko does not overcomplicate it. If a loan decision turns out to be unfair, the algorithm cannot be the one blamed. The bank chose to use it, so the bank carries the responsibility. That means senior leaders cannot hide behind technical language. They have to stand behind the outcomes.

He stresses that human oversight is not optional, especially for complicated or sensitive cases. Models need regular checks. They need to be tested for bias. They need proper audit trails. Otherwise, problems build quietly.

He also worries about something bigger. If many banks start depending on the same AI providers, risk can pile up across the system. One flaw could affect more than just one institution. Efficiency is important. But, it cannot come before accountability.

The Islamic Finance Lens

From an Islamic finance point of view, this is not just a technical debate. It goes deeper than that. Islamic banking is guided by Maqasid al-Shariah, ideas around justice, fairness, and social welfare. Lending is not only about numbers on a balance sheet. It carries a social responsibility.

Yes, AI can make processes smoother. Faster approvals. Cleaner risk models. That part is clear. But Jatmiko flags something more subtle. If the data used to train these systems reflects a past where small businesses were routinely sidelined, the algorithm may quietly repeat that history.

And if that happens, the technology could end up working against the very goals Islamic finance is supposed to protect. Not intentionally, but just by following patterns.

Aligning AI with ethical principles requires intentional intervention in model design and governance. It may require bringing social scientists into AI development processes. It may demand stronger oversight, particularly when tools are sourced from third-party providers.

Technology alone does not guarantee fairness. Design choices matter.

Possibility Of A Hybrid Future

So, where is banking headed? Fully automated lending systems may emerge in low-risk, low-value segments. Routine cases can be processed at speed and scale. But both experts see the broader future as hybrid.

Ekpa believes competitive advantage will come from institutions that combine AI’s analytical power with human judgement, rather than eliminating one in favour of the other.

Jatmiko similarly expects automation to expand, but insists that human supervision will remain essential, especially for complex or high-impact decisions.

Human-in-the-loop processes are already becoming common. Algorithms analyse. Humans validate. Decisions are checked before final approval. Perhaps, the future banker will not be replaced, but repositioned.

The Big Question

For borrowers, the shift may be invisible. Applications are approved faster. Rejections arrive more quickly, too. What changes quietly, beneath the surface, is how those decisions are made.

Is human judgement fading? Or simply moving further upstream, designing and supervising the systems that now perform the analysis?

The rise of the AI loan officer is not dramatic. No headlines are announcing the end of human bankers. Instead, there is gradual integration, more data, faster models, and shorter decision times.

Machines are increasingly involved. That much is clear. But whether they ultimately decide, or merely assist, depends less on technological capability and more on governance choices.

Banks can treat AI as an efficiency engine. Or, they can treat it as a tool that augments, rather than overrides, human responsibility. The distinction may determine not only how loans are approved, but how trust in the financial system evolves in the years ahead. And trust, unlike data, cannot be automated.

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According to the latest figures from job search platform Adzuna, the average advertised salary hit £42,278 in April 2025, a rise of 8.9% year-on-year, marking the steepest annual increase since June 2022. Every month, salaries rose by 0.75%, further complicating the central bank’s efforts to justify additional interest rate cuts.

The Monetary Policy Committee (MPC) of the Bank of England is now witnessing its key members, including the Bank’s chief economist Huw Pill, expressing concern about elevated wage growth, warning that loosening monetary policy too quickly could reignite inflationary pressures.

According to Adzuna, vacancies rose slightly by 1% year-on-year to 862,876, but were down 0.95% compared to March, suggesting a mixed picture for hiring momentum.

What’s going on?

Sectors seeing the strongest demand for workers included healthcare, which hit its highest vacancy level since January 2023, as well as hospitality, logistics, teaching, and retail. The construction and trade sectors recorded a sharp 15.2% decline in vacancies, reflecting cooling activity in those industries.

The BoE had been hoping for a clearer signal that inflationary pressures were easing before committing to a series of rate cuts in the second half of 2025. However, April’s inflation surprise, which saw the consumer price index jump to 3.5%, up from 2.6% in March, has prompted fresh caution.

Although the ONS reported a slight slowdown in overall wage growth, down to 5.6% in Q1 from 5.9% in Q4, starting salary trends suggest that employer competition for skilled staff remains high, particularly in regions with labour shortages. The MPC has a dilemma: to stay with rate reductions to stimulate growth, or pause to prevent an inflationary rebound.

A Chartered Institute of Personnel and Development (CIPD) study paints a different yet painful picture.

The report, titled “Labour Market Outlook – Spring 2025,” found employer confidence declining again this quarter, with the net employment balance falling to +8 — the lowest level recorded outside of the pandemic. Hiring intentions have softened, and one in four employers now plan redundancies, rising to 27% in the private sector.

Rising employment costs, including increases in National Insurance and the National Living Wage, are forcing many organisations to scale back recruitment, limit training investment, and consider price increases. Uncertainty around the Employment Rights Bill and global events adds to employers’ caution.

“The further softening in employment in April suggests businesses continued to respond to the rise in business taxes and the minimum wage by reducing headcount,” said Ruth Gregory, deputy chief UK economist at Capital Economics.

She also stated that despite a deceleration in wage growth, it remained relatively strong, meaning the Bank of England will remain cautious over future interest rate cuts.

For BoE, the key concern is that if earnings grow quickly, firms will seek to push up prices, thereby putting up the inflation rate.

As per Gregory, sticky wage growth (a situation where wages do not immediately adjust up or down in response to changes in labour market conditions) may mean the bank remains uneasy about inflationary pressures in the near term.

Wage hike: A new battlefield?

The Bank of England has noted that wages have quietly continued to rise, raising concerns that this could indicate a seismic and more long-lasting shift in the relationship between workers and employers. In May, the European country announced its public sector pay awards, which were higher than ministers had previously said they could afford and outstripped higher-than-expected inflation.

Still, it failed to please the disgruntled doctors. In fact, the latter threatened to protest against the new pay structure. After teachers were awarded a 4% increase, teaching unions also responded angrily to the Keir Starmer government’s refusal to fully fund the deal and warned that it would damage the quality of education that pupils received. The largest union plans to take the first step towards possible industrial action.

The decision to award 1.4 million NHS staff, including nurses, midwives and ambulance workers, a smaller rise (3.6%) also met with anger. The Royal College of Nursing (RCN) said it was “grotesque” to hand doctors a bigger increase than nurses who earned less than them.

Wes Streeting, the health secretary, and Bridget Phillipson, the education secretary, sought to defend the rises by highlighting that they represented the second time public sector personnel had received above inflation pay rises since Labour took power in 2024.

Are we seeing a 2022 scenario being played out all over again? Back then, inflation not only rocketed, it led to a situation where, in a desperate scramble to keep pace with rising prices to protect their incomes, British private and public sector workers took widescale industrial action in a way that brought back memories of the 1970s. What followed was a series of pay deals thrashed out between bosses and employees, with unions often arguing they had been due pay increases for years.

When considering the British private sector, relations between bosses and the rank and file have already been redefined by a shift towards remote working caused by the COVID-19 pandemic, and then companies’ increasing insistence on more regular attendance at work. Despite the volatile background, Threadneedle Street policymakers now ask whether the wage increases indicate that the power balance has moved back in the direction of workers, allowing them to protect their finances. Data from the Office for National Statistics (ONS) has gone some way to justifying the BoE view.

According to payroll data from the ONS, wages in the hospitality sector rose sharply, with hotels and restaurants increasing staff pay by 8.5% in the year to April, well above the 3.5% inflation rate. Retail workers also saw gains, with median pay rising by 6.9% over the same period. Across the economy, average wage growth reached 6.4%.

Recently, BoE chief economist Huw Pill said the UK’s labour market was becoming less flexible, suggesting employers were no longer able to freely hire and fire as they once could. Businesses, charities and public sector organisations have been laying off staff and freezing job adverts, but those staff who stay behind are well rewarded.

Ben Caswell, an economist at the National Institute of Economic and Social Research (NIESR), said, “Wages adjusted for inflation have returned to where they were before the cost of living crisis began in 2021. And the share of overall national income that is secured by workers rather than firms has also recovered to 2021 levels. While the average pay figures disguise many winners and losers, the aggregate figure showed most workers had benefited from inflation-busting pay rises to recover lost ground.”

He also focused on a slightly less up-to-date measure of pay based on employees’ average regular earnings over a rolling three-month period. This showed a rise in Great Britain that was still well above inflation at 5.6% in January to March 2025, though not as much as the PAYE data shows.

Caswell sees a series of minimum wage increases, closing the gap with the average wage, which is likely to fuel further pay rises as companies attempt to maintain a significant difference between the salaries of those on the bottom rung and the semi-skilled workers and middle managers above them.

What to expect next?

James Smith, research director at the Resolution Foundation, said that the weakening economic outlook worked against a prolonged recovery in pay.

He noted, “If we believe that wages consistent with the Bank of England’s 2% target would be about 3.5%, then we are well above that level at the moment. And that would give the Bank good reason to be cautious about cutting interest rates. However, other pay surveys are showing earnings rising at a much slower rate, so the official figures might be a bit like Wile E Coyote and about to be brought down to earth.”

Emphasising the likely short-term nature of the current bumper pay rises, the bank’s regional agents say employers are limiting pay rises to between 3% and 4% by the end of 2025. The Starmer government is not planning to pay more than 4% to public sector workers on average, and more departmental budget squeezes may be coming up.

Talking about other industries, take the hospitality sector, for example, which is known to employ a high proportion of minimum wage workers, and the same applies to the retail industry, boosting pay in 2025.

Senior journalist Phillip Inman claimed that most likely not next year or the year after, the legal minimum salaries will start rising more slowly.

Seemanti Ghosh, principal economist at the Institute for Employment Studies, sees the significant return to office-related demands from the companies as direct evidence of worker power reaching its limits. There has also been a gold rush for digital skills, which will result in another paradigm shift in the labour market.

Employers had to pay higher wages this time around, as they needed to retain skilled staff and pay them more while they embarked on a search for workers who were more adaptable in an ever-changing work environment.

“If wage increases are not driven by negotiations with unions, then they are due to employers wanting to hang on to skilled staff. This matters for all companies that increasingly rely on soft skills for things like project management and tech skills in other areas. We also see it in the green sector, where there is a shortage of people with the skills the industry needs,” Seemanti remarked.

How much of this dislocation is systemic and will keep wages higher for longer will be a subject of debate for the rest of the year. Pill advocated for keeping interest rates elevated while the trends become clearer, believing there is less damage from higher rates than letting inflation run away again.

Other MPC members disagree, arguing that businesses cannot invest in skills training while borrowing costs are prohibitively high.

It reflects a starkly different view of the labour market, one that emphasises the lasting damage caused by rising job losses and prolonged economic stagnation.

Swati Dhingra and Alan Taylor want rates to come down quickly. Who wins the argument inside the central bank could dictate whether workers or bosses have the whip hand in the great tussle over pay.

The post UK wage hikes: Who dictates terms? appeared first on International Finance.

The frequency with which the topic is brought up at high-level conferences is one indicator of how concerned international policymakers are about the extraordinary rise in global debt. It also comes up almost every week. In April 2024, International Monetary Fund (IMF) Managing Director Kristalina Georgieva told the Atlantic Council that she was concerned the current decade would be regarded as “the turbulent 20s.”

Across the world, the primary topic of discussion is debt, which is undoubtedly rising every day. The figures provide cause for concern. Gross borrowing for the 38 member countries that make up the so-called OECD region increased by precisely $2 trillion in 2023, from $12.1 trillion to $14.1 trillion. It will worsen: the OECD projects an additional $1.7 trillion increase in 2024. Even while the United States was the main offender, borrowing almost two-thirds of the $14.1 trillion in 2023, it is evident that this puts pressure on the global debt markets, whose ability to issue debt is limited.

Currently, there is a significant amount of debt in the markets. It is expected that the total borrowings, known as “outstanding marketable debt,” for 38 governments will reach $56 trillion by 2024. If that figure is striking, consider that it has increased by $16 trillion in just the last five years. This will mark a record level of debt.

The average debt-to-GDP ratio is likewise abnormal, which is possibly much more worrisome. From 73% in pre-COVID to roughly 83% in 2023, it has increased in real pre-inflation terms. And by the end of 2024, it will undoubtedly have increased. Meanwhile, interest rates are getting close to 3% of GDP, making new borrowing more expensive.

Pouring in more trillions

The performance of emerging markets is suffering. In 2023 alone, around $1 trillion more in sovereign bonds were issued in the so-called EMDEs (emerging market and developing economy) countries, bringing the total to $3.9 trillion.

China has a strong and quickly expanding appetite for this type of debt, even though it is hardly an EMDE. It now accounts for 37% of emerging nations’ bonds, up from 15% in 2021. Many issuers, both inside and outside of China, are alarmed by that figure.

It should come as no surprise that EMDEs borrow more against less because their economies are not expanding quickly enough, their credit ratings are declining, and the cost of debt is rising in tandem. According to the OECD, there were at least 24 downgrades and six upgrades in the group of low-income and lower-middle-income countries, which includes about 130 countries with an average per capita GDP of $12,300.

The unfavourable outcome is that the amount of outstanding governmental debt has increased to previously unheard-of proportions. Even though longer payback periods and inflation appear to improve these ratios, the debt still requires repayment. For many countries, it represents an imminent threat.

The makeup of the debt is just as important as its amount. The United States, the largest economy in the world, could have to refinance at least a third of its public debt by 2024, according to the OECD’s annual analysis of global debt. That is a minor issue of $11.3 trillion. The US Treasury will undoubtedly be in charge of the effort, but as the economic advocacy group Peter G. Peterson Foundation notes, it amounts to around $103,000 for each and every American.

According to the foundation, the cost of an ageing population, underfunded services, and other long-term contributing factors are some of the reasons why America’s debt load has been increasing for years: “a mismatch between spending and revenues.” The United States can at least bear its debt.

The OECD observes that “decisions on debt composition become even more intricate in emerging markets.” The Paris-based organisation characterises this as “exposure to fluctuations in global risk sentiment in an increasingly shock-prone world,” which is the reason they must deal with rising volatility.

IMF Deputy Managing Director Gita Gopinath is another policymaker who has often expressed her concerns. At a Washington conference titled Fiscal Policy in an Era of High Debt in late 2023, Gopinath presented concerning statistics regarding the long-term and rapidly rising levels of government debt. Global public debt has tripled since the mid-1970s and accounts 92% of GDP in 2022. Therefore, debt levels had been increasing for a while.

“Rising deficits and debts in countries such as the US have serious ramifications for emerging and developing economies, which are hit by rising rates and weaker currencies,” Gita Gopinath said, in sobering economic terms, presenting a grim picture, particularly for economically weaker nations. Additionally, many economies are already experiencing debt hardship, especially low-income nations.

Fractured fiscal rules

The old, more convenient regulations have been broken for several reasons, which is one of the numerous challenges involved with lowering global debt. One is the global financial crisis (GFC) of 2008, which overnight resulted in previously unheard-of amounts of quantitative easing, whereby central banks printed money and lent it to the financial sector at extremely low interest rates to support them.

Another issue is that, despite having their own fiscal policies, most countries are finding it increasingly challenging to adhere to them and are resorting to debt issuance to sustain economic activity. The OECD laments the “frequent deviations from the rules.” Since the GFC, few have managed to control their debt.

More discipline, supported by a form of fiscal police, is the OECD’s suggested remedy.

The OECD suggests, “We need rules anchored on spending targets that respond to shocks and have clear mechanisms to correct for non-compliance.”

Independent fiscal councils can also strengthen checks and balances.

Others, meanwhile, believe that a new form of economics is required. Atif Mian, a professor of economics, public policy, and finance at Princeton University, cautions that relying on credit to increase demand endangers the global economy and that the fundamental imbalances must be fixed.

However, until then, we have what he refers to as “a massive debt supercycle that threatens the global economy.” He continues by advocating for a “long-term balance between what people earn and what they spend” in an article published in the esteemed Finance & Development journal. One of the 21st century’s most urgent concerns is to break that loop.

Nevertheless, habits must shift before that may occur. The US and other mostly prosperous countries have made government (or sovereign) borrowing all but mandatory. Additionally, citizens who expected ongoing generosity from a country that could barely afford it criticised governments like Britain for using “austerity economics” when they attempted to lower their debt in the wake of the Great Financial Crisis. When the Macron administration tries to follow other countries and gradually raise the pension payout age, France is running into the same issues—riotous protests, in fact—which are slowly destroying the entire economy.

Accumulation of debt

Debt binges have been increasing for more than fifty years, beginning when the effects of the Great Depression started to subside. For instance, the United States’ overall debt more than doubled to 300% of GDP after hovering at 140% of GDP between 1960 and 1980. The American example has also served as a lesson to the rest of the globe.

According to Professor Mian, “Debt’s unrelenting upward trajectory could not be stopped, not even by the Great Recession of 2008 (the outcome of the GFC), which was largely caused by excessive borrowing.”

It would be incorrect to assume that 2008 was just the result of a few regrettable policy errors. Deep structural imbalances in the economy were the cause of the debt accumulation that precipitated the 2008 crisis. Both those inequalities and the risks they pose continue to exist.

However, what is the source of this hazardous imbalance and excessive debt? Most scholars agree that, ironically, the surplus savings of wealthy individuals and nations are a major underlying cause of economic issues. It is undeniable that the wealthy are growing increasingly richer, a trend that has persisted throughout history.

For nearly 40 years, the wealthiest 1% of people have been accumulating wealth at an accelerating rate, with many benefiting significantly from the digital boom. Thus, some nations have become richer than others, most notably China, whose growing wealth is invested far more in local banks and other savings institutions than in affluent Western countries. They each assert a disproportionately larger amount of the world’s revenue, which leads to financial surpluses that feed the “global debt supercycle.”

Regrettably, due to the banking sector’s failure to meet its objectives, a significant portion of this debt tsunami is being misdirected. A healthy financial sector would direct financial surpluses toward productive investments, like constructing and maintaining infrastructure and developing technology. Since investment returns would cover any debt resulting from such productive lending, it would be organically sustainable.

Mian continues, “The debt supercycle’s inability to fund profitable investment is regrettably one of its main characteristics. Real investment as a percentage of GDP has stagnated or even decreased during the past forty years, despite the fact that total debt as a percentage of GDP has more than doubled. The worrying conclusion is that we are wasting around half of the trillions of dollars in new debt issued in the last two years. Rather than funding investments that might contribute to wealth creation, it has instead been used to finance governments’ and consumers’ wasteful spending.”

Naturally, only falling interest rates fuel this cycle. Long-term memory holders will recall that the US 10-year real interest rate was approximately 7% in the early 1980s. It has recently fallen as low as below zero. Ordinary people are encouraged to spend rather than save as high rates enter the consumer finance system.

Handling crises

Debt-related catastrophes have occurred behind the scenes, virtually invisible to the public.

Central banks, which are responsible for maintaining financial stability, have had to control disruptions in the quickly expanding non-bank financial sector that could have had disastrous repercussions if they had spread more broadly. Only skilful and mostly anonymous crisis management prevented the worst.

In a recent lecture, Nick Butt, head of the Bank of England’s future balance sheet branch, says that “these non-bank institutions have grown in significance across a range of markets, including those that households, businesses, and governments use to borrow, save, or access financial services.”

About half of all UK financial assets, including corporate loans, have been acquired by non-bank institutions in the last 20 years, essentially from a standing start. Similar events have occurred in other European nations, posing yet another risk to the stability of the financial system.

Why? The reason for this is that non-banks often utilise the gilt repo market and maintain substantial holdings of gilts, also known as sovereign bonds, both domestically in Britain and internationally. The Bank of England buys and sells gilt-edged securities here, albeit few outside of the financial community are aware of how it operates.

Established in 1996, this massive market witnesses billions of transactions daily to maintain the liquidity of the banking system. As other central banks have noted, Butt asserts that the impact of the rise of non-banks is far from theoretical. They have created new weaknesses and sources of liquidity risk that have an all too real potential to cause financial instability and have an effect on the broader economy.

Some may argue that the current situation is more actual than prospective. During the COVID lockdowns, the UK government’s bond markets experienced a sharp decline in March 2020 due to a widespread rush for short-dated, cash-like securities. As banks of all kinds tried to fulfil their own liquidity commitments, there was a rush for cash throughout the financial industry. To support the central bank, the major dealer banks contributed almost £50 billion through the gilt market, but it was insufficient, illustrating the anxiety that permeates a heavily indebted economy.

The money markets managed to survive the crisis, despite the pressure. Two years later, Britain experienced another crisis immediately following the abrupt “go-for-growth” economic policy of the short-lived prime minister Liz Truss. This time, the long-dated gilt market was particularly affected, revealing what Butt referred to as “vulnerabilities in liability-driven investment funds” that threatened the nation’s financial stability.

Liquidity is crucial, particularly when non-banks receive the dreaded margin call, and their own creditors become alarmed. Central banks and international authorities are currently making significant efforts to close these gaps before they become too large.

Twenty years ago, the US Federal Reserve, the Bank of England, and other major institutions faced a simpler time, when they only had to worry about the large retail and investment banks, and the world’s debt levels were lower.

Responsible titans of banking

Positively, the majority of large, systemic banks around the world are safer now than they were before the Great Financial Crisis. They have greater capital, the funds that are first in line to absorb losses, and are better positioned to safeguard depositors as a result of the lending excesses made public by that crisis. Although there are regional variances, the majority of nations have implemented the rules created by the Bank for International Settlements, and international regulators are now considerably more at ease with the financial industry’s titans.

The United States, which is meant to be the land of regulation, experienced three bank failures in early 2023 alone: Silicon Valley Bank, Signature Bank, and First Republic. Meanwhile, the Swiss government needed to save the once-dominant Credit Suisse before it collapsed. The Swiss government planned for rival UBS to purchase the bank for $3.25 billion in June 2023 after a quagmire of poor regulation and incompetent management.

There are worries that a much-feared run on social media will increase the likelihood of bank failures. Prominent European bankers conducted a provocative study that suggests “the sudden withdrawal of bank deposits, celebrated by digital technology, contributed to the failures of these banks,” highlighting the rapid spread of misinformation.

According to the report, “social media and mobile banking apps were unheard of or barely existed” during the catastrophic bank runs that preceded the Great Financial Crisis.

What’s next?

The tightrope act calls for a gradual reduction in global debt and much more prudent investment, that is, in areas of the economy that will provide the proper growth. The majority of economists still support GDP, but they do it in a more sophisticated and nuanced manner that emphasises what is best for both people and the environment.

In summary, this represents significant progress. However, some argue that the usefulness of growth, particularly debt-funded growth, has outlived itself. The “degrowth lobby,” led by Greta Thunberg, contends that living standards are currently adequate and that modern capitalism has been mistaken in concentrating on GDP.

Academic circles do not widely accept the concept that “good growth” improves lives. But as the 10th edition of this insightful study, the IMF’s most recent World Happiness Report, demonstrates, economic growth isn’t everything. Indeed, some of the happiest countries are the poorest.

“It is evident that, although GDP per capita is a strong predictor of happiness, it is not the only element when we compare it with the report’s happiness rankings. Additional factors, including life expectancy, social support, independence, charity, and the lack of corruption, also contribute to the explanation of the disparities in happiness among nations,” the report stated.

In other words, the relationship between GDP and behaviour is significant. For this reason, despite having a GDP per capita of only $20,000, Costa Rica, which is well-known for its economic philosophy of la pura vida, which aims to consider everyone’s well-being, ranks a high 6.61 on the Happiness Index, while incredibly wealthy Singapore comes in slightly below.

Remarkably, poor countries like Guatemala (6.15 at $8,262), Nicaragua (6.26 at $5,842), and Kosovo (6.37 at $11,690) rank only below Singapore. Afghanistan, ranked lowest at 1.86, and Lebanon, ranked second at 2.39, are unlikely to trail the de-growth winners.

A strategic thinker, IMF Deputy Managing Director Gita Gopinath warns high-borrowing, wasteful countries.

“Debt-financed spending may nevertheless seem alluring in the current climate, where it is politically challenging to reduce expenditure or raise taxes. However, as borrowing costs climb sharply, that would be a serious miscalculation that would put debt on an unsustainable track. What governments can and cannot do needs to be reconsidered. The government cannot serve as the primary safety net for every unforeseen event. Additionally, revenues must match expenditures,” Gita Gopinath remarked.

The post Global debt hits breaking point appeared first on International Finance.

The Office for National Statistics said that public sector net debt, excluding public sector-owned banks, increased from 99.3% in July to 100% of GDP for the first time since monthly records were kept in 1993.

According to Bank of England data, debt was last regularly at this level in the early 1960s, when the country was still recovering monetarily from World War Two.

Both both the COVID-19 outbreak and the global financial crisis, government debt skyrocketed. The increase as a percentage of GDP since then has also been aided by feeble economic growth.

Around 3.3 billion pounds more than in August of the previous year, the government borrowed 13.734 billion pounds ($18.29 billion) in August. A 12.4 billion pound deficit was indicated by a Reuters poll.

The data revealed an increase in current spending and social benefit spending, which was indicative of higher-than-normal inflation.

Rachel Reeves has cautioned that taxes will rise in her budget, which is due on October 30. However, she has excluded raising the rates of income, corporate, and value-added taxes, meaning there is little space for improvement in public services and increased investment.

During an interaction with Zawya, PwC economist Gora Suri said, “The August public finances figures highlight the challenging fiscal position facing the Chancellor ahead of her first budget.”

During the first five months of the 2024–2025 fiscal year, the government has borrowed a total of 64.1 billion pounds, which is around 6 billion pounds more than the Office for Budget Responsibility had predicted when it released its March projection.

For each of the past four months, the deficit figures have exceeded the OBR’s projection.

The Bank of England owns government debt of several hundred billions of pounds. Debt as a percentage of GDP increased to 92%, a record, from 91.6% in July when the BoE was excluded.

The post UK debt surpasses 100% of GDP, piling pressure on Rachel Reeves appeared first on International Finance.

However, even with lower borrowing costs, concerns about affordability persisted. The primary house price balance, which gauges the difference between surveyors’ observations of increases and decreases in home prices, entered positive territory for the first time since October 2022, according to a report released by the Royal Institute of Chartered Surveyors.

Its house price balance increased from -18 in July 2024 to +1 in August, significantly exceeding the Reuters poll’s average economist prediction of -14. Expected sales for the next three months were at their highest level since January 2020—before the COVID-19 pandemic hit the United Kingdom.

Additional markers of the European country’s real estate market suggest that the industry is gaining traction following a recent decline in interest rates.

According to data from mortgage lender Halifax, house prices rose in August at the fastest annual rate since late 2022. However, competitor Nationwide reported that prices fell in August for the first time since April, with a month-over-month decrease of 0.2%.

Chief economist at RICS Simon Rubinsohn stated that there was some doubt regarding the potential for future budget and Bank of England interest rate cuts.

“Affordability remains an issue in the sales market even with somewhat cheaper finance now available but the picture appears even more acute in the lettings market where the amount of rental stock continues to diminish,” he remarked.

In October 2024, British Finance Minister Rachel Reeves will present her tax and spending plan. In September, the Bank of England (BoE), on the other hand, is anticipated to keep interest rates steady, after cutting borrowing costs for the first time last month from a 16-year high of 5.25%.

The general mood and buyer interest have improved, according to RICS’s monthly survey. From +4 in July to +15 last month, its measure of new buyer enquiries reached its highest point since October 2021.

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According to figures released by the Office for National Statistics (ONS), the GDP increased by 0.6% in the first three months of 2024. The rise comes after the decline of 0.1% and 0.3% in the third and fourth quarters of the previous year. Two-quarters of an economic downturn in a row is the standard definition of a recession.

“Widespread growth” in the leading service sector, whose output increased by 0.7% in the quarter after declining toward the 2023 end, was the primary driver of the expansion in early 2024.

The Bank of England now anticipates that the United Kingdom’s GDP will increase by 0.5% this year, double the rate it predicted in February. In contrast, the GDP only increased by 0.1% in 2023. S&P Global’s survey of purchasing managers indicates that in April 2024, the combined output of manufacturing and services saw its biggest increase in nearly a year. Service companies were once again the growth’s main driver.

But the British economy is doing worse than those of its counterparts. The International Monetary Fund revised its prediction of 0.6% to 0.5% economic growth for Britain this year. Germany is the only developed economy with a slower anticipated growth rate than this one, out of the Group of Seven (G7).

Roger Barker, head of strategy at the Institute of Directors, a corporate lobby organisation, said, “Any recovery is still at an early stage and it is likely to be weak, but there are welcome hints of green shoots.”

Election approaching

Nevertheless, Rishi Sunak and his ruling Conservative Party will feel some respite from their severe defeats in last week’s municipal elections, which boded poorly for the party’s prospects in the general election. He faced additional humiliation as one of his legislators joined the opposition Labour Party.
The growth statistics, according to a statement from UK Finance Minister Jeremy Hunt, are “evidence that the economy is returning to full health for the first time since the pandemic.”

However, his Labour Party opponent, Rachel Reeves, stated that British households were still having difficulty despite the GDP growth. In the general election, polls indicate that the Labour Party will easily defeat the Conservatives. According to a YouGov study, 48% of participants said they planned to vote for Labour in the election, compared to 18% for the Conservatives.

Demons called inflation and unemployment

A return to economic expansion could potentially cause mortgage rates to remain high for longer, delaying the widely anticipated interest rate reductions.
Nomura analysts stated that “higher GDP growth enhances the risk of stronger demand pressures on inflation” and the GDP data “casts doubt” on an immediate rate cut. The European country’s annual inflation rate was 3.2% in April 2024, which is a significant decrease from almost 10% approximately a year earlier.

Governor Andrew Bailey stated that the central bank aims for a rate of 2% and anticipates approaching it in the next few months.

“We need more proof that inflation will stay low before we can decrease interest rates,” he said, while keeping the official borrowing costs at 5.25%.

Bailey further said that while a June interest rate cut was not out of the question, it was also not guaranteed and would depend on data on inflation and the job market.

Between January and March 2024, the unemployment rate rose to 4.3%, and the long-term decrease in job opportunities persisted, with 898,000 positions available during the reporting period, down 26,000 from the previous three-month period and, more significantly, down 188,000 from a year earlier. Although the number is still 102,000 higher than it was before the COVID-19 pandemic, that brief period when there was more employment available than unemployed people has long since passed. The most recent total of claims, however, was close to 1.6 million.

Generally speaking, employers want to wait to fire employees until necessary because redundancy programmes are costly, disruptive, and demoralising to the remaining workforce. If you make a mistake, having to locate new acquaintances is equally expensive and inconvenient. This is a case of some postponed effects from the recession that occurred in 2023.

Is the worst yet to come?

The next financial catastrophe is already visible to the Bank of England. It cannot put an end to it on its own. Bank executives worry that uncertainty in a crucial industry that has become more significant and risky in recent years could lead to another financial market collapse, a la, Liz Truss.

Concerns centre on the “nonbank financial intermediation” sector, a broad phrase that encompasses all significant non-bank investors, including hedge funds, pension funds, insurers, and private equity.

Global standard-setters have been struggling to govern this little-understood sector, but many officials feel that Britain needs to act more urgently given that four risky “nonbank” occurrences in as many years have nearly brought down the British economy.

There have previously been warnings from watchdogs in the European Union, the United States, and other countries about the market chaos that could result from a significant collapse in this industry. But because half of the finance for British businesses now comes from nonbanks and financial markets, Threadneedle Street faces an especially urgent issue.

As a result, any crisis or unrest might not only cause issues for the City of London but also directly impact the employment of thousands of individuals.

The Bank of England is unwilling to wait for the next mishap to occur. But since it can’t solve the problem on its own, it is advocating globally for a solution.
Speaking freely under anonymity, an EU source stated, “The UK has been clearly pushing it because of the size of the NBFI [nonbank financial intermediation].”
Before the next round of volatility causes significant economic harm, the Bank hopes that its battle scars will generate impetus for a global crackdown. It has set out on its path to resolve the problems, but in the absence of global unity, it might just amount to a never-ending game of whacking away at the next new issue that arises.

All eyes on BoE

The British central bank has been struggling lately. Reportedly, it had to reduce issues at UK pension funds back to manageable levels after the mini-budget of former Prime Minister Truss unsettled government bond markets.

Threats to the stability of the British financial system included the rush for cash at the beginning of the COVID-19 pandemic, the collapse of the Archegos hedge fund, and the turbulence in the nickel markets following Russia’s annexation of Ukraine.

These days, nonbanks make up half of the financial system, both in the UK and worldwide. In the United Kingdom, financial markets and nonbanks provide half of the capital for enterprises; in the European Union, this percentage is only 27%.

The concern is that this non-banking portion of the financial system has taken on all of the risks since the global financial crisis of 2008. In contrast, banks have been subject to mass regulations over the past 15 years, forcing them to strengthen their resilience after the global financial crisis rocked the underpinnings of the system.

Nonbanks gorged on cheap debt to boost investor returns during the post-crisis decade of low interest rates when copious amounts of money poured around the system. Central bankers worry they are more exposed now that the economic landscape is shifting due to higher rates and tighter money.

The BoE’s lack of knowledge regarding who has overindulged in debt and where is a serious source of concern. Sarah Breeden, deputy governor of the Bank of England, stated at a central bank seminar in February 2024 that “gaps in our knowledge have meant we are mostly creating resilience in market-based finance in response to crises, while we should be aiming to build resilience ahead of vulnerabilities crystallising.”

It is working alone to learn more. Senior BoE officials have issued warnings about the dangers hidden in private equity and private credit, which occur when investors lend money or purchase companies outside of public markets.

It will release more information on the possible threat that private equity poses to stability in June 2024, including an analysis of how prominent the investment giants’ companies are in specific areas of the British economy and whether or not they pose a greater risk than other types of businesses.
The executive director of the Bank of England, Nathanael Benjamin, issued a warning in April 2024 over “the development in sorts and amount of leverage, or ‘leverage on leverage’, throughout the ecosystem.”

Additionally, the bank is conducting the first-ever stress test of its sort to find out how nonbanks would respond to extremely high levels of possible market stress. In 2024, the results may lead to stricter regulations.

However, the UK central bank might be doing nothing since nonbank dangers are intrinsically worldwide. In reality, quick action is required from organisations like the Financial Stability Board (FSB), a worldwide watchdog, or its equivalents.

The core of the global reform agenda is becoming more and more focused on the topic of debt and where it might blow up markets. It might entail a crackdown on how some financial firms leverage borrowing to inflate returns to avert another global financial catastrophe.

Conor MacManus, director of financial services risk and regulation at PwC, stated, “You’d anticipate these to be areas of regulatory scrutiny, given over leverage and illiquidity are often at the heart of most collapses.”

The Financial Stability Board (FSB) will conduct a leverage consultation with a panel co-chaired by UK markets regulator Sarah Pritchard. The goal of the consultation is to address the underlying cause of the problem, rather than addressing it only when a catastrophe occurs.

However, that won’t happen until December 2024 and isn’t going to become official policy for a while, so it lacks the urgency the Bank needs.

There are some supporters of the BoE’s call for action. The European Union will propose certain measures for a broader framework in May 2024. Separately, meanwhile, there is growing disagreement over how far market regulators and central bankers should go.

This division has in the past limited the scope of changes; it was evident once more in the UK when chief markets regulator Nikhil Rathi played down the BoE’s worries about private equity.

The last thing the central bank wants is competition on its soil since development overseas is happening at a glacial pace.

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