24 October 2024: Reeves is planning an “Amazon tax” to save High Streets

“Jitters” have begun to afflict asset markets and the pound as Rachel Reeves’ first Budget is less than a week away.

The pound has broken through the 1.30 level versus the dollar, despite the support it is receiving from speculation that the Bank of England may not cut interest rates at the next meeting of its Monetary Policy Committee.

It was thought that the rise of the country’s debt pile to above 100% of GDP would be a temporary phenomenon, but the IMF believes that based on predicted taxation, spending and growth figures, it may become the “norm”.

A new survey from the accountants’ union, the ACCA, has shown that less than one-fifth of accountants have a positive view of the economy.

Next week’s budget will need to contain measures to promote growth and investment, even as the Chancellor tries to fill the black hole she says exists in the country’s finances.

Accountants believe that red tape and bureaucracy, particularly around Brexit regulations, should be addressed or given more priority as the Government strives to show its progressive side.

Reeves is said to be considering a tax hike for online retail giants like Amazon to level the playing field for high-street competitors. Big online outlets receive help from business rates, which are based on the size of a firm’s stores. The tax hits physical shops harder, and the edge given to online rivals has been blamed for the slow death of town centres nationwide.

Amazon argues that a superior business model should not see it penalized, and tax relief to brick-and-mortar retailers would be a better alternative, although Reeves is committed to bringing more money into the country’s coffers rather than giving rebates.

The Bank of England is poised to cut interest rates much faster than investors predict over the next year, Goldman Sachs has forecast. At its current level of 5 per cent, the UK base rate “remains notably restrictive”, Goldman Sachs said, adding that it believes that the Bank of England “will ultimately lower rates more than priced by financial markets given continued progress on disinflation and recent dovish commentary”.

It is likely that over the next year, the Bank will vote to lower rates substantially as the threat posed by inflation fades, although the era of ultra-low rates seen before the Pandemic is not going to be repeated.

Inflation fell below the Bank’s target last month, although that is not expected to be repeated over the short to medium term. The vote at the next MPC meeting is expected to be close, with the Governor likely to have to use his casting vote.

The pound lost ground versus the dollar yesterday as it fell to a level not seen since mid-August. It reached a low of 1.2907 and closed at 1.2921.

With the election in the U.S. on the horizon and the October Employment report due next week, the pound’s path lower may be interrupted over the next couple of weeks.

Jerome Powell has had a particularly good run as Chairman of the Federal Reserve, curating the fall of inflation from close to double figures to its current level close to the two per cent target.

However, by his own admission, certain issues within the economy remain beyond his reach.

One such problem is the current state of the housing market. Housing affordability has become a significant challenge in America, with high home prices and elevated interest rates making mortgage payments increasingly burdensome for prospective buyers.

On Sept. 18, the Federal Reserve implemented its first rate cut since March 2020, lowering the target for the federal funds rate by 50 basis points to a range of 4.75% to 5.00%.

While rate cuts by the Fed typically lower borrowing costs, experts say increased affordability in mortgages could lead to a higher demand for homes that would drive up home prices.

Powell addressed these concerns in a press conference following the September rate cut announcement.

He acknowledged that the housing market is “in part frozen,” with many homeowners hesitant to sell because they are locked in at lower mortgage rates. As rates decrease, more people may be willing to sell, potentially increasing market activity. However, he noted that each sale could also bring a new buyer into the market, so the impact on overall demand is still uncertain.

Powell highlighted what he believes to be the true driver behind the housing crisis.

“The real issue with housing is that we have had and are on track to continue to have, not enough housing,” he said.

In other words, it’s a supply problem.

He explained that it has become increasingly difficult to find and zone land in desirable locations, and “all aspects of housing” face challenges.

“This is not something that the Fed can really fix”.

A singularly odd phenomenon has been seen in recent polls related to the election. Voters are saying that should Donald Trump be victorious on November 5th, they believe that it may usher in a period of relief for several communities that have become exhausted by rises in everyday essential goods.

Trump is thought to be far more concerned about the country’s image overseas, than the economy.

Despite the expected rise in volatility over the next two weeks, the dollar continues to return to levels not seen since before the summer.

Yesterday it reached a high of 104.57 and closed at 104.42.

The eurozone economy isn’t weakening rapidly, but questions have been raised about whether an expected recovery is underway, Philip Lane, the ECB’s Chief Economist commented yesterday.

Speaking at the IMF/ World Bank’s annual conference in Washington, Lave commented that while the central bank’s forecast in September that growth would pick up next year, recent surveys and economic data have shown signs of stagnation.

He said that while those surveys weren’t entirely consistent with the ECB’s forecasts, they didn’t point to a significant deterioration in the outlook.

It is true that the Eurozone economy hasn’t seen a dramatic scale of weakening over the past twelve to eighteen months, but that in itself may be a greater problem as it points towards a systemic issue rather than a reaction to either monetary policy or geopolitical events.

Lane said policymakers will continue to respond to economic data in an “agile” way, although the Governing Council is not renowned for agility.

ECB President, Christine Lagarde, is also in Washington. She played down the significance of the three rate cuts that the Central Bank has delivered recently, saying that they have been in line with the pace of deflation and the Bank’s stated aim of being data-driven.

In a conversation with Frederick Kempe, President and CEO of the Atlantic Council, Lagarde explained that the ECB’s interest rate decisions would continue to depend on incoming economic data, underlining the need for caution in assessing the evolving economic conditions.

“We are confident that the disinflationary path is underway and that we could continue to dial back the restrictive monetary policy, but we need to be cautious.”

Lagarde was strident in her comments that there is no preordained strategy for rate cuts, and that each meeting treats the current situation on its own merits.

A proposed investment fund will provide a major impetus to Germany’s ailing economy, Economy Minister Robert Habeck predicted in Berlin on Wednesday. “If business would then invest more, that would unleash the big booster for the national economy,” Habeck, who also serves as vice chancellor, said.

Under Habeck’s proposals, companies will receive 10% of all their investments, either through tax deductions or through reimbursement in case of a low tax burden.

The new fund is to be financed through new debt, although Habeck did not use the word. “It has to be financed in advance. I do not see any other realistic political option,” he said.

The euro continues to decline as the market is convinced that the Eurozone economy and monetary policy will continue to diverge from the U.S.

Before the ECB began its cycle of rate cuts, there were concerns that it may fall behind the U.S. but that issue has not materialized as the gap in growth in the two economies has widened significantly.

The single currency fell to a low of 1.0761 yesterday and closed at 1.0782.

Have a great day!