4 December 2024: Population growth makes a mockery of Productivity Data

The UK economy comprises mostly small and medium-sized enterprises, and the risks are escalating for this considerable sector. A recent survey found that almost half of all small businesses are concerned about the possibility of a recession in the next eighteen months. This is up from thirty-five per cent earlier in the year.

Most are now prioritising survival over growth and have shelved their expansion plans.

Managing cash flow has become the top reason for loan applications, accounting for 61% of financing submissions, up from 49% a year ago.

Credit brokers are reporting that rising pessimism and fears of a recession are reshaping SME mindsets. They have seen a surge in demand for larger loans from businesses looking for extra financial stability in uncertain times.

A Commons committee has warned that the two-year delay in reforming the UK’s official labour market statistics is a “major blow” that could lead the Bank of England and the government to make ” misinformed ” economic decisions.

Dame Meg Hillier, Chair of the Treasury select committee, said that the delay would rob policymakers of reliable data about the jobs market, making “some of the most consequential decisions taken by the Treasury and Bank of England challenging at best and misinformed at worst.”

Sir Ian Diamond, National Statistician and head of the UK Statistics Authority believes that the Office for National Statistics would not be able to publish accurate figures on key measures of employment, unemployment, and labour force participation until 2027.

The lengthy delay to the revamped Labour Force Survey will further frustrate the Monetary Policy Committee.

Policymakers at the Bank have long complained about the veracity of official figures on employment, unemployment, and labour force participation as they make decisions on how far to cut interest rates in the coming months.

Bank of England Governor Andrew Bailey believes that the cost of mortgages could rise in the New Year as many UK households, including renters, are still facing pressures from the increased cost of living and high interest rates. However, the share of households who are behind in paying their mortgages is low by historical standards.

Furthermore, the share of households spending a high proportion of their income on mortgage payments is expected to remain low.

There has been significant discussion about the rebranding of one of the UK’s most iconic businesses as Jaguar, now Land Rover Jaguar has changed to be an all-electric carmaker.

Yesterday they released the first images of their latest concept car, and along with their most recent advert, it drew mixed results.

Reform UK Leader Nigel Farage, a champion of British manufacturing in the past, was quoted as saying that the company’s departure from its traditional market may see it go out of business.

The pound remains under pressure despite rallying yesterday as prospects for a rate cut in the U.S. became a little clearer.

The British Retail Consortium’s (BRC) Like-for-Like Retail Sales shows shoppers tightening their belts with a surprise 3.4% drop in sales in November after a 0.3% gain in October, and well below the 0.7% rise expected.

Sterling rose to a high of 1.2699 and closed at 1.2671.

It has been made obvious over the past ten days that Jerome Powell is content to allow members of the FOMC to provide the market with guidance as to how they will vote at the next FOMC meeting, which will take place on December 17th and 18th.

This two-day meeting will also include the publication of the Fed’s periodic Summary of Economic Projections.

Following a slew of comments from both Fed Presidents and Governing Board members on Monday, yesterday Governor Adriana Kugler spoke again and said that she is taking a meeting-by-meeting approach to monetary policy.

Kugler, a voting member on the FOMC this year, said inflation appears to be on a sustainable path to its 2% target, “even if there have been some bumps along the way,” she said in a speech at an event hosted by the Detroit Economic Club.

“The labour market remains “solid,”. This theory is about to be tested by the imminent publication of the November employment report.

In assessing incoming data, Kugler expects to see “some bounce back” in November non-farm payrolls. The October data showed growth of only +12K jobs, much less than the +125K that was expected.

October’s report “should have shown something much stronger,” but the data took a hit of 100K-120K jobs because of Hurricanes Helene and Milton and a strike at Boeing, she said during the Q&A portion of the speech.

Chicago Federal Reserve President Austan Goolsbee said on Tuesday said he sees interest rates needing to come down a “fair amount” over the next year as rates remain in restrictive territory.

Over the next year, it feels to me like rates come down a fair amount from where they are now, Goolsbee said.

“If your inflation gets close to the target, and your unemployment gets close to where you want it, and the GDP growth of the economy is coming back to something like a trend, but the interest rate remains well above where you think they need to settle, you have to be careful.

San Francisco Fed President Mary Daly believes that the Fed needs to recalibrate policy. That was taken by the market to mean that she favours a loosening of monetary policy.

Rates will begin to fall more quickly in the first two quarters of 2025 as the Fed strives to remove restrictive policies. However, Powell will want to avoid “spooking the market” into believing that the economy is weaker than is generally believed.

The dollar has slowed the pace of its Trump-inspired rally over the past two weeks as traders contemplate the jobs data and the upcoming FOMC meeting. It was marginally lower yesterday, falling to 106.09 and closing at 106.34.

Italian Central Bank Governor, Fabio Panetta, said yesterday that the European Union needs to set up a common spending programme to fund strategic investments that are indispensable to boost productivity and keep pace with the United States. Although he didn’t mention the report that was released recently, written by his compatriot Mario Draghi, Panetta repeated its sentiments.

A continent-wide “productivity compact” could envisage the issuance of common debt worth 800 billion euros a year for six years through 2030, Panetta said in a speech at the 20th Spain-Italy Dialogue Forum in Barcelona.

Although the ECB is facing other issues, it will at some point have to adopt Draghi’s recommendations since the European Commission appears to be hamstrung as it tries to deal with economic, political, and social issues.

France’s aggressive stimulus policies have already pushed its budget deficit to 6% of GDP, while its debt-to-GDP ratio has surged to 112%, up from 95% in 2015.

In 2023, President Emmanuel Macron faced widespread protests over his decision to raise the retirement age from 62 to 64, a move that, while meaningful, barely scratches the surface of the country’s fiscal challenges.

As European Central Bank President Christine Lagarde recently warned, France’s fiscal trajectory is unsustainable without far-reaching reforms.

An impending no-confidence vote in France could spell unwelcome news for the economy. Rising interest rates to finance the country’s public debt and a spate of bankruptcies are making investors nervous.

Many American and British progressives admire France’s model of big government and wish their own countries would adopt similar policies. But debt markets have recently woken up to the risks posed by France’s ballooning debt. The French government now pays a higher risk premium than Spain and, remarkably, Greece.

A quarterly survey amongst bosses of 1,000 French small and medium-sized companies about their investment behaviour, showed that in October, only 36% of them were planning to maintain their investments with 45% saying they’d postpone them and 18% wanting to cancel them.

That trend started to emerge at the beginning of the year, but it gained traction after July’s snap parliamentary elections.

A mid-November survey by UK consultancy Ernst & Young, amongst two hundred international company bosses, yielded comparable results. Roughly half of those questioned had downsized or postponed their investment projects. France has been top of EY’s investment attractiveness survey in Europe since 2019.

There have been several factors behind the fall in business confidence. Many firms are struggling to repay loans they received from the Government during the Pandemic, while there is a glut of office space since many workers are choosing to work from home in a growing global trend. The transition towards electric vehicles is also creating a strain on the economy as manufacturers struggle with targets.

The Euro made marginal gains yesterday but made only a small dent in its losses from Monday. It rallied to a high of 1.0535 and closed at 1.0509.

Have a great day!