12 November 2024: Growth estimates may be a little optimistic

The Chair of the House of Commons business committee has warned that the election of Donald Trump as the new President of the United States is a doomsday scenario for the UK economy.

Should Trump go ahead with his threat to impose tariffs on U.S. imports, it will cause considerable damage to several sectors of the country’s manufacturing and services output.

Liam Byrne is concerned about the possibility of a trade war, which will be exacerbated by the country’s decision to leave the European Community following Brexit.

In the run-up to the election, the Republican promised to implement 10 to 20 per cent tariffs on all goods coming into the country, a figure that rises to 60 per cent for those from China.

The National Institute of Economic and Social Research think tank has already warned that the change could halve UK economic growth.

He said the NIESR believes that the British government should appeal to Mr Trump’s fears over US defences and security regarding China and argue that higher duties mean weaker defences.

Kim Darroch, the former US ambassador, said he expected Trump to “go big” on tariffs, adding: “I think it will be quite a challenge for the UK, since I don’t see any special deal coming for the UK.”

Overall, the UK economy had a strong start to 2024, recording substantial GDP growth of 0.7 percent and 0.5 percent in the first two quarters respectively, but growth has fallen in the second half of this year.

While part of the initial rise reflects a bounce-back recovery from a technical recession at the end of 2023, it was driven by strong consumer sentiment on the demand side and was helped by construction and production firms on the supply side. Most of the strong start however came from the services sector, which was estimated to have driven the majority of the growth in the first quarter and almost all the growth in the second quarter.

Since then, consumer sentiment has fallen sharply, with the GFK consumer confidence index, which had been slowly increasing from the pandemic, falling back from -13 in August to -21 in October.

While the OBR was positive about the budget’s impact on short-term growth, it was pessimistic about the impact on by the end of their five-year forecast. Some may be surprised by this, given the leading role given to long-term economic growth by the Chancellor.

The economy may be on course for a fairly bumpy ride over the first half of this Parliament, which could see the Government’s projections for growth, increased prosperity and improved social services blown significantly off course.

Yesterday, the pound lost ground again, falling to a low of 1.2856. It will be some time before the impact of the U.S. election dissipates and the dollar is targeting its year’s high, which for sterling is around 1.2300, although there are several factors which may halt such a significant advance.

The Pound closed at 1.2866 yesterday.

Almost the entire FOMC has plenty to say about the economic effect of the election and their decision to cut interest rates by twenty-five basis points last week.

The small matter of the significant drop in job creation in October will also be discussed as Waller, Barkin, Harker, and Kashkari speak later today, followed by Williams, Logan, Musalem and Schmidt tomorrow.

The timing of the latest FOMC meeting may have been unfortunate given there was so much happening economically that coincided with it, but the six weekly “rota” of meetings is “set in stone”.

Given the extraordinary circumstances created by the election result, the markets feel that the decision to cut rates was correct. Yet again, had the employment report been available prior to the meeting, the cut may well have been fifty basis points.

The effect on market sentiment of a Trump victory was a little more predictable, but the FOMC would consider that to be little more than “froth on the cappuccino” which may well dissipate in the coming weeks, although since Trump is considered “business friendly”, he may cause inflation to rise again given the tax cuts he is expected to introduce going forward.

Jerome Powell and his colleagues will be more concerned about rising inflation than they have been over the past three months, but since it may take the entire first quarter for Trump’s initial policy initiatives to take effect, they “did the right thing for what they face currently.

There is still speculation about Powell’s future at the Fed, but, on balance, observers believe that he will be allowed to see out the rest of his term.

The first Fed President out of the block was Neel Kashkari, who has already warned that Trump’s deportation plan could disrupt the economy, but its ultimate impact would depend on the details of the policies.

Kashkari said that if farms, factories, or industries relying on immigrant labour suddenly lose workers, it would likely cause some disruption.

The market still expected the FOMC to provide another rate cut at its December meeting, but Kashkari believes that even though the Committee remains “data-driven”, Trump’s policies may introduce a degree of uncertainty.

He is also concerned that China may well introduce “tit-for-tat” tariff policies, which may influence the U.S. economy.

The dollar has continued its reaction to the election result. The index rallied to a high of 105.70 yesterday and closed at 105.50.

There are so many factors feeding into the dollar’s current strength that it may be some time before it “levels off”.

It may be possible that the resistance that has been in place for several months between 106 and 106.50 may see traders look to take profits on long positions as the year draws to a close, but given the current state of the Eurozone economy, the uncertainty in both Japan and the UK and an imminent trade war, the dollar may retain a degree of strength until well into the New Year.

Germany has again found itself labelled as the sick man of Europe as political turmoil is added to the economic woes that have plagued the country for almost eighteen months.

Just hours after it became clear that Donald Trump had won the U.S. vote, sending shockwaves across Europe, Chancellor Olaf Scholz appeared before cameras to announce the end of his battered, three-way alliance in rather dramatic fashion.

Scholz’s announcement set in motion a series of events that will lead to a German snap election within months, although the exact timing isn’t yet clear.

Germany’s three-party ruling coalition, consisting of the Social Democratic Party (SPD) and the Greens on the left of the political spectrum, and the fiscally conservative Free Democratic Party (FDP) on the centre-right, was never a match made in heaven.

Both the SPD and the Greens favour a strong social safety net and big investment to speed economic growth and green energy transition. The FDP, on the other hand, believes in less government and less spending.

The fragmentation has worsened with the rise of the far-right Alternative for Germany (AfD) party, now polling in second place nationally, and will continue with the arrival of populist-left newcomer Alliance Sarah Wagenknecht (BSW).

Post-war Germany hasn’t had much experience of larger coalitions (Scholz’s fallen triad was the first three-way alliance in over six decades), but the ongoing division may make such coalitions, which tend to be more volatile, the new norm.

Italy, the Netherlands and Belgium have all experienced coalition governments in the past few years and while the economies of the countries have had varying degrees of success, it is on social issues like immigration that those coalitions struggle.

Indeed, the collapse of the German coalition was due in part to a disagreement between Scholz and Lindner, the recently sacked former Finance Minister, over levels of immigration.

The election of Donald Trump has cast a massive shadow over the Eurozone economy.

A looming new trade war could push the eurozone economy from sluggish growth into a full-blown recession.

While China was the primary focus of the tariffs the first time around, Europe could be in the firing line in Trump’s second term. European Union economic growth is already struggling and has lagged the US in recent years. The bloc expanded by 0.2% in the most recent quarter, compared to 0.7% growth in the US.

The US is Europe’s largest market for exports, particularly for industries like automobiles, pharmaceuticals, and luxury goods, so any tariffs could cause further pain. Germany’s stuttering auto industry, a crucial part of Europe’s largest economy, could be particularly affected.

It has been said many times that when one currency is likely to rise with little on the horizon to halt it, the market contrives to find a way to “knock it down”.

So it is proving right now, with no end seemingly in sight to the dollar’s strength, (and Euro weakness). The dollar is rapidly reaching an overbought state where speculation has taken over from trade-based buying.

The Euro has often been seen as an overtly weak currency, and a fall to parity with the dollar appears to be imminent. Given the economic, political and social issues facing the Eurozone currently, such a situation is developing, but the market will find a way to correct the situation.

Yesterday, the common currency fell to a low of 1.0628 and closed at 1.0655. It looks set to test support at 1.0600, but some “natural” buy orders may stand in the way of further losses.

Have a great day!