27 November 2024: Reeves may be forced to cut services to avoid tax increases

Following her appearance at the CBI’s Annual Conference earlier in the week, Rachel Reeves has been told that to keep her pledge not to raise taxes again during the life of this Parliament, she will be forced to slash public services from 2026 onwards to stay within her own fiscal rules if growth remains at its current level.

Economists believe that this is why the Government is introducing several policies to lower the number of working-age people who are currently claiming sickness benefits.

The Prime Minister claimed that the Government inherited a country that “isn’t working”. Echoing the famous Conservative message from 1979, in which it claimed that “Labour isn’t working—a reference to the number of unemployed, which was the issue of the day.

Starmer has pledged to tackle Britains biggest drivers of unemployment and inactivity.

In a major blow to both employment and the Government’s targets for the introduction of electric vehicles, Stellantis, the owner of Vauxhall as well as Peugeot, Renault and Fiat announced its plans to shut its plant in Luton and move EV production to its plant in Ellesmere Port.

The move puts eleven hundred jobs at risk as Stellantis joins rival carmakers in scaling back operations in a difficult trading environment. The Government said Stellantis’ investment in its Ellesmere Port plant was encouraging, but it would be a concerning time for the families of employees at Luton.

In June, Stellantis called on the government to do more to boost demand for electric vehicles to help it follow rules requiring carmakers to sell more EVs, cautioning that inaction could lead to a halt of its British production.

The announcement came as carmakers such as Volkswagen, Ford, Nissan and GM are cutting jobs globally in response to softening demand for EVs, which consumers see as too expensive, and increasing Chinese competition.

Bank of England Deputy Governor Clare Lombardelli said on Monday she was more worried about the risk that inflation comes in higher, not lower, than the Central Bank has forecast, as she made the case for only gradual reductions in interest rates.

Lombardelli, making her first speech since joining the BoE in July, said recent downbeat business surveys suggested that inflation could cool while strong wage growth posed a threat in the opposite direction.

She said she thought those risks were currently balanced.

“At this point, I am more worried about the possible consequences if the upside materialized, as this could require a more costly monetary policy response,” Lombardelli told a conference organized by King’s Business School.

Her colleague, Huw Pill, the Bank’s Chief Economist, is scheduled to speak later this evening. He has had a recent record of slightly more hawkish comments and voted against the MPC’s August rate cut, although he backed the second cut made earlier this month.

The pound lost ground yesterday as the dollar rallied after President-elect Trump reiterated his plan to introduce tariffs on American imports. This led the market to adopt a risk-off attitude, driving Sterling to a low of 1.2507, although it later rallied to close at 1.2558.

Donald Trump made a speech yesterday in which he reiterated his plans to introduce tariffs on U.S. imports from “day one” of his Administration.

He did however “add some meat on the bones” of his plans by singling out America’s three largest trading partnerships, China, Canada, and Mexico for “special attention” while he explained the real reason behind his plans.

While the UK and EU will also face tariffs on exports to the U.S., he singled out China to try to force them to control exports of Fentanyl, a drug which has reached epidemic proportions in America and to force Mexico to do more to control the flow of undocumented immigrants crossing the U.S.’ southern border.

While he made no specific announcements about Canada, other than to group it with his country’s major trading partners, Trump is believed to be concerned about the number of automotive parts that are made in Canada which could be easily produced south of their mutual border.

All three nations responded to Trump’s comments. A spokesperson for China’s embassy in Washington, Liu Pengyu, told the BBC that “China-US economic and trade co-operation is mutually beneficial in nature”.

He denied that China allows chemicals used in the manufacture of illegal drugs – including fentanyl – to be smuggled to the US.

“China has responded to the US request for verifying clues on certain cases and taking action,” Liu said.

Meanwhile, Mexico’s President Sheinbaum told reporters on Tuesday that neither threats nor tariffs would solve the “migration phenomenon” or drug consumption in the US.

Reading from a letter that she said she would send to Trump, Sheinbaum also warned that Mexico would retaliate by imposing its taxes on US imports, which would “put common enterprises at risk”.

She said Mexico had taken steps to tackle illegal migration into the US and that “caravans of migrants no longer reach the border”.

Canadian Prime Minister, Justin Trudeau, said his country was prepared to work with the US in “constructive ways”.

“This is a relationship that we know takes a certain amount of working on, and that’s what we’ll do,” Trudeau told reporters.

In a phone call with Trump, Trudeau said the pair discussed trade and border security, with the Prime Minister pointing out that the number of migrants crossing the Canadian border was much smaller compared with the US-Mexico border.

The minutes of the latest FOMC meeting were published last evening. They held very few surprises, with most Fed officials and Regional Presents agreeing that while rate cuts would continue, their pace does not need to be “gradual”.

The dollar index rallied to a high of 107.56 but drifted lower to close at 106.88, as the market prepared for tomorrow’s Thanksgiving holiday.

The market has reacted to this week’s activity and confidence data by showing that there is currently no reason to buy the common currency other than for commercial purposes, since investment levels continue to fall.

Downside risks persist for the Euro as it faces pressure from growing concerns about the region’s economic outlook. These concerns are fuelled by uncertainties surrounding political instability in France and Germany.

The Euro is extremely sensitive to risk and could face further downward pressure as continental economies struggle with worsening sentiment. This follows Trump’s escalation of worldwide trading tensions. Although he only singled out Canada, Mexico and China for “special mention” yesterday, Trump is said to have specific concerns surrounding the European luxury car market.

Marine Le Pen, the right-wing two-time French Presidential candidate who is currently the subject of a criminal investigation, is threatening to block Prime Minister Michel Barnier’s budget in a move which risks toppling his government and triggering a full-blown Eurozone crisis.

Barnier has admitted his concern at the potential for a Greece-style budget crisis, warning that “Everything can explode”. France is struggling with worsening economic conditions, as key sectors are showing alarming downturns, and the business outlook is darkening.

The Hamburg Commercial Bank Flash France Services PMI dropped to 45.7 in November from 49.2 in October, hitting a ten-month low. This is part of a wider downturn, as the composite PMI, which combines services and manufacturing, fell to 44.8, its lowest point since January.

France’s economic woes are part of a larger narrative affecting the eurozone, driven by geopolitical tensions and fiscal uncertainties.

The political instability, worsened by budget disputes, could disrupt reforms and policymaking, impacting France’s economic recovery. As businesses face a grim outlook, the effects could reach beyond France, potentially influencing European markets and international partnerships.

German Economy Minister Robert Habeck on Tuesday proposed subsidies to stabilize fluctuations in electricity network costs, as consumers and companies withstand the worst of high energy bills that have hindered production and investment.

The subsidies “would be a short-term measure for 2025, which could still be technically implemented through a supplementary budget for 2024,” Habeck said on the sidelines of an industry conference in Berlin.

Habeck said preparatory work for the subsidy was completed, but the proposal faces uncertain prospects in the current legislative period after the collapse of Germany’s governing coalition.

As the euro nears parity with the dollar, it is underperforming even amid broader global currency struggles. However, stalled reforms and fiscal constraints in key economies threaten recovery, leaving Europe’s growth outlook increasingly grim.

Yesterday it fell to a low of 1.0425 but recovered as traders squared positions in advance of tomorrow’s holiday in the U.S.

Have a great day!