25 January 2024: The UK economy is on course to avoid a recession

There is a marked contrast between the relative performance of the UK and the Eurozone so far in 2024.

Data published yesterday revealed that the UK’s services sector, which makes up 80% of GDP, powered ahead in January. Output grew to 53.8 preliminary data showed, up from 53.4 in December.

Manufacturing output is still in contraction, but there was some improvement seen there too. Output in this sector grew from 46.2 to 47.3.

It appears that economist’s gloomy forecasts for the comparative performance of the UK versus the Eurozone may have been a little ill-advised.

With the Bank of England expected to cut interest rates appreciably before the ECB, even if the total of cuts expected this year is going to favour the Eurozone, the outlook for the UK is improving.

Tax cuts and other stimulus measures are expected to be announced in the budget, which can only improve the outlook.

The Westminster “Soap Opera” continues to throw up stories of unrest as one of Rishi Sunak’s former advisers called for the Prime Minister to be ousted since the Party is facing a calamitous result in the forthcoming general election.

Will Dry, who quit last November after becoming disillusioned with the direction the Prime Minister was taking, helped commission a poll, published recently, that predicted a landslide victory for the Labour Party and years in the political wilderness for the Conservatives.

The jousting between Rishi Sunak and Sir Keir Starmer continued at Prime Minister’s questions yesterday, with the Labour leader buoyed by the poll which predicted a similar wipeout to that seen in 1997.

A report by a group supported by Virgin Media, Gregg’s and the London School of Economics has called for the appointment of a “Better Business Tsar”. The report believed that the UK economy would benefit by close to £150 billion if there was a single focus on the social environment as well as hi-tech and environmental challenges.

While this sounds like yet another call for the levelling up process that did not take off under the stewardship of Boris Johnson, the fact that it is supported by several “big hitters” from the UK industry means that it deserves to be considered.

The pound recovered some of the ground lost earlier in the week, rallying to a high of 1.2775, but the Greenback recovered towards the end of the day and Sterling closed at 1.2716.

It seems that only a severe setback in the court cases that Donald Trump is facing can derail his bid to become the Republican Party’s choice to challenge Joe Biden to become the next President of the United States.

Trump scored another resounding victory in the New Hampshire Primary over the only challenger he now has remaining. He called for Nikki Haley to “retire gracefully”, but the former U.S. Ambassador to the United Nations and Governor of South Carolina promised to fight on.

Trump mocked his challenger by telling his supporters at his victory rally to allow her “a moment of celebration” in the fact that she has become the last woman standing in the race to become Republican Nominee.

In what will be a rerun of the 2020 Presidential Election, Trump will be both the best and worst opponent for President Biden to face.

He is the best candidate since he is such a polarizing figure that the Democrats could win based on an “anyone but Trump” attitude amongst voters and the fact that he has beaten him before.

Democrats will also be concerned that there will have been a shift to the right in U.S. politics, with Trump promising to “do the right thing” in both Ukraine and Gaza.

The world will look on anxiously in November, with the global geopolitical situation unlikely to have changed radically in the intervening period.

The Dow Jones index retreated a little from the record high it achieved on Tuesday as Microsoft became the first company to achieve a market capitalization of over three trillion dollars.

This typified the “risk on” attitude that is growing, which saw the dollar index retreat yesterday as a new round of air strikes against Houthi rebels inside Yemen was shrugged off. Until there is a significant response, the market will adopt a view that the U.S. and its UK ally, have the situation under control.

The index fell to a low of 102.77 but recovered to close at 103.25.

The market’s focus will now switch to next week’s FOMC meeting, although members of the Committee have now entered a blackout period when they are forbidden to discuss their voting intentions. Although there is almost no chance of a change to the Fed Funds rate, traders and investors will be interested in Jerome Powell’s press conference to try to decipher any clues about when rate cuts will start.

The split in the Governing Council of the ECB has now taken on a geographical angle, as well as a divide between hawks and doves. It emerged yesterday that overall, Southern European States have been far more affected by the programme of rate hikes which the ECB recently ended.

Although Spain has recovered well from the Pandemic, its economy would be far stronger than it is currently if the ECB had been less aggressive.

Spain didn’t suffer the same level of inflation as its neighbours in Portugal and Italy, so it didn’t need the level of tightening that was called for by the more hawkish nations in the North, for whom the hikes in interest rates were seen as a natural reaction to rising inflation.

Yesterday’s publication of output data for the Eurozone showed cautious signs that the worst may be over the region.

Although Germany and France are still suffering a decline in the composite index of manufacturing and services combined, the data for the entire Eurozone was more encouraging.

The region is still in decline overall, but the composite index rose to 47.9 from 47.6, halting several months of worsening data.

Although this was the eighth consecutive month of declining output, there does seem to be a bottoming out happening. This improvement will be aided by an interest rate cut, but the market will probably have to wait several months to see one.

Today’s meeting of the rate-setting committee is certain to leave rates unchanged, while the market will be keen to see if there is any change to Christine Lagarde’s rhetoric when she speaks following the announcement.

Lagarde, who is no doubt still smarting from the criticism she has received this week from inside the ECB, will probably give a fairly neutral view of the economy highlighting the slight improvement in output, but will remain concerned about wage settlements which are still well above the level of inflation.

The euro regained a little poise as the dollar index corrected. It rose to a high of 1.0932, about quickly ran out of steam and fell back to close at 1.0879.

Have a great day!