1 October 2024: Business optimism is falling

At the Conservative Party Conference, former Chancellor, Jeremy Hunt, claimed the Government could have a budget surplus of £39 billion rather than the “fictitious” £22 billion black hole it says it inherited from the Tories.

He told delegates, “You don’t have to take my word for it, I mean, just read this week’s Economist where there’s an article saying that Reeves could have not a black hole of £22 billion, but a surplus of £39 billion to play within the budget.

The byplay over who is telling the truth will likely continue until either the Office for Budget Responsibility produces a definitive account of the country’s finances, or either Reeves or Hunt accepts some compromise figure.

The Financial Times did a Freedom of Information request to the Treasury to ask where this fictitious £22 billion number came [from], the reply they got back from the Treasury was we cannot give you the workings because we’re not sure they are accurate.

Labour Party members are still dubious about the claim, otherwise, they wouldn’t be having this debate over the winter fuel allowance.

A £6.4bn cost of supporting asylum seekers being unfunded was the most specific claim, as it did not appear in the Home Office’s departmental budget.

According to the Public Spending Audit, public spending on pay was expected to be around £12bn higher across central government departments in 2024-25, even before the newly announced pay rises were considered.

In short, this figure does stand up broadly to scrutiny, and was recognized by the respected and independent body, The Institute for Government, and the only real dispute is how much Labour knew about it before taking office.

That claim is impossible to prove since no one is “coming clean” and saying definitively who saw the data, but it is inconceivable if, before the election, one of Reeves’s team didn’t go through the numbers if they were provided with access.

Business confidence is declining in the UK, just as the Government is about to sponsor a major conference to encourage foreign investment in “UK Inc.”

Business chiefs are the most pessimistic they have been about Britain’s economy since late 2022 when the country was still reeling from the effects of Liz Truss’s short spell as prime minister.

The Institute of Directors has said that the fear of looming tax hikes and workplace regulations, expected to be brought in by the new Labour government, had contributed to the drop in its monthly economic confidence index.

The survey records the percentage difference between respondents who say they are pessimistic about the economy against those who say they are optimistic. It was minus 38 per cent in September, having tumbled since July, when more directors said they were optimistic than pessimistic in the aftermath of Labour’s general election victory.

There has been concern from newly elected Labour MPs that the Cabinet has been too forthright in its claims of how bad the situation was when they inherited it.

It would explain the undue haste with which Rishi Sunak called the General Election, knowing that the situation would be worse by the time he had a mandatory duty to call it.

The Pound ended the month with four sessions in which it made very similar highs, around 1.3423, yesterday, it closed at 1.3350.

In a speech delivered last evening in Nashville, Fed Chair, Jerome Powell hinted that the rate cuts that took place last week will be the only one in the current cycle that is of fifty basis points.

Although he is not permitted sight of the September Employment Report, which is due to be published on Friday, he is confident that the headline figure for jobs created will be similar to what was seen in August.

The FOMC has been criticized since its meeting last week for not offering sufficient advance guidance to the market, and this has led to a continuing period of uncertainty surrounding the dollar.

Powell signalled that more cuts will be made this year, but it is unlikely that his colleagues will sanction another fifty-point cut.

We are not on any preset course,” Powell said during his prepared remarks, highlighting that the economy remains resilient but will require balanced actions.

He noted that if the U.S. economy continues to evolve as expected, policy adjustments will gradually move toward a “neutral stance,” which refers to interest rates that neither stimulate nor slow down the economy. Powell acknowledged that while inflation has cooled, challenges remain in achieving the Fed’s 2% inflation target.

Contrasting the larger-than-expected half-percentage-point cut made earlier this month, Powell indicated that future reductions would likely be smaller, with two additional quarter-point cuts anticipated before the end of the year. “This is not a committee that feels like it’s in a hurry to cut rates quickly.”

The Fed’s bias has shifted from fighting inflation to ensuring that the U.S. continues to exhibit a level of growth that is conducive to job creation.

Confirming Powell’s thoughts, Atlanta Fed President Raphael Bostic outlined his expectations for a gradual, “orderly” easing of monetary policy over the next 15 months in an interview with Reuters yesterday.

His baseline scenario sees the policy rate falling to a range of 3.00% to 3.25% by the end of 2025, a level he considers neutral for the economy.

The policy stance will receive a raft of information this week with job openings, job cuts, weekly jobless claims as well as economic output data and speeches from FOMC members Hammack, Musallam, Bowman and Barkin.

The dollar is still flirting with the bottom of its medium-term range. Yesterday it traded up to a high of 100.92 and closed at 100.76.

The week has begun with Central Bank Governors and monetary policy setters trying to convince the market that they have a policy on the right track.

Following Andrew Bailey’s recent comments about a gradual reduction of the base rate, and Jerome Powell’s clarifying the Fed’s intended pace of rate cuts, Christine Lagarde gave her views on monetary policy going forward.

Speaking at a European Parliament hearing, she noted increased optimism among eurozone policymakers about controlling inflation. She indicated that this sentiment would be reflected in the next monetary policy meeting.

Lagarde highlighted that eurozone inflation might temporarily rise in Q4 due to the exclusion of earlier energy price drops from annual data. However, she expressed confidence that inflation would return to target levels in a timely fashion, suggesting that this would be considered in the October policy meeting.

In September, the ECB forecast overall inflation at 2.5% for this year, dropping to 2.2% in 2025 and 1.9% by 2026. This pace of deflation is disputed by the market, which feels that it will fall more quickly.

Following Lagarde’s comments, the probability of a 25-basis-point rate cut by the ECB in October increased to 85% in bond markets.

Recent economic data from various eurozone countries, including weaker-than-expected inflation figures from Spain, France, Italy, and Germany, have fuelled discussions about a potential rate cut.

The latest data suggests that the eurozone’s September inflation rate might fall below the 2% target for the first time since mid-2021.

European Union countries cannot compete alone with the likes of China and the United States and need a far more integrated single market to create pan-European businesses of the required global scale, Mario Draghi said on Monday. This, after all, is the purpose of the single market, to give Europe a “seat at the table” with the major global economies.

The former European Central Bank chief, whom the European Commission asked to rewrite a report on EU competitiveness, told a seminar at the think tank Bruegel in Belgium that the most important step the European Union had to take was integration.

“If productivity is the objective, scale in many of the sectors that we have analysed has become, in a sense, its essential ingredient and scale you only get it with integrated single markets,” Draghi said.

There is a large volume of data due for release this week, including preliminary inflation data, unemployment and services and manufacturing data for the entire Eurozone as well as Spain and Italy.

There are also speeches scheduled from Governing Council members Schnabel, De Guindos, and Elderson.

Yesterday, the Euro again lost ground as the dollar continued to come to terms with G7 monetary policy actions.

It fell to a low of 1.1137 and closed at 1.1148.

Have a great day!