The launch of the Chinese chatbot DeepSeek has caused turmoil in the markets. The release of China’s newest AI – which appears to work as effectively as programmes developed in the West – saw tech stocks plummet when the market opened today. It hasn’t helped that DeepSeek was made for $6 million: pennies compared to its competition. All assumptions about this technology – the required parts, the assumed costs – have fallen apart and investors are panicking over what was already a muddled future for the development of AI.
But in the midst of market turmoil, there is always a degree of stability. As markets lose confidence in emerging tech products, they seek refuge in stable investments: that’s to say, they look to safe governments as an alternative for their investments.
And the UK is one of the many winners. Today, for the first time since the start of the year, the 10-year gilt in Britain fell below 4.6 per cent. Gilts now sit just above their levels one week after Labour’s first Budget – still elevated from pre-Budget levels, but well below their peak of 4.9 per cent earlier this month.
In terms of pure number-crunching, it’s the best news the Treasury has had in some time, so the Chancellor will be breathing a sigh of relief. When gilts neared 5 per cent, it was estimated by Capital Economics that Rachel Reeves £10 billion headroom has all but disappeared, leaving her in breach of her own fiscal rules and looking at some unpalatable options come the spring, including the kinds of spending cuts that would have made the self-proclaimed ‘austerity Chancellor’ George Osborne take a pause.
There will still be lots of tough choices to make, but this fall in borrowing costs, if it sticks, is going to take a lot of pressure off Reeves as she plans her next moves – including savings of billions of pounds that would have otherwise gone on servicing the debt.
Of course it’s far too soon to say with confidence that markets have had a change of heart. The evidence this morning does not point to a renewed faith in the borrow-and-spend habits of this government, but rather a new fear that the West’s most advanced AI developers have just been rattled by the Chinese doing it on the cheap. It’s also a reminder how vulnerable UK interest payments are to world events: whether it’s the rise of a new American president, or the rise of new tech subject to the rules of the Chinese Communist Party, Britain’s finances are affected.
Were the debt-to-GDP ratio not hovering at a staggering 100 per cent, it would be much easier to manage. While today’s shifts in the market bring welcome news to the Chancellor and her team, there is no controlling for the possibility of plenty more unpleasant shifts ahead.
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