19 July 2023: Business leaders join with the PM to “turbocharge growth”

Rishi Sunak has invited business leaders from several sectors of commerce to join a new initiative he has started to “turbocharge” economic growth. CEOs from companies such as AstraZeneca, Sainsbury, and BAE Systems are among those joining the Business Council.

The fourteen members of the council are considered leaders in their field and represent some of the country’s largest employers.

Sunak was “at pains” to say that this will not be just another talking shop, and the issues that are raised, and the proposals that are considered will be fed directly into Government policy.

The Prime Minister is keen to demonstrate that there is room for a joint initiative between the public and private sectors.

The CEO of BAE Systems, Charles Woodburn, spoke of his belief that now more than ever, it is important that the Government work closely with industry to ensure that every opportunity is carefully considered to drive economic prosperity forward.

The council will have the opportunity to consider proposals from the new legislation that is being considered to provide feedback to the Government about its expected effect, both good and bad, on the wider economy.

The Bank of England’s Monetary Policy Committee will meet in two weeks, and the market is expecting its “new-found” level of hawkishness to continue with another fifty-basis point hike in the base rate of interest.

Andrew Bailey has faced criticism for not acting sooner when it became clear that the measures that were already taken were not having the desired effect on prices. It became obvious during the first quarter of the year that the MPC was trying to balance its inflation worries with concerns that its actions may drive the economy into recession.

More recently, Bailey and some of his senior colleagues have expressed their belief that the economy is sufficiently resilient to stand a more aggressive approach.

The data for food price inflation was published yesterday. It consolidated the view that this part of overall price increases has indeed peaked. It is still uncomfortably high at 14.9% but has fallen from the high, close to 20% seen in recent months.

The pound reacted positively to the market’s view that a further fifty-point hike will be announced at the next MPC meeting. It rallied to a high of 1.3109, but ran into some selling pressure and close at 1.3072.

After some weeks of positive economic data, the figures for retail sales that were published yesterday, were mediocre at best. Mediocre suits the Federal Reserve for the time veins as it both reduces the pressure for further rate hikes going forward and relieves concerns about a contraction in GDP.

As the FOMC considers the “final mile” in its more than fifteen-month journey to bring inflation back to target, its Chairman, Jerome Powell, will soon turn his sights upon how to keep the economy on its current path.

This will have to be done in concert with the Treasury Secretary to allow the Central bank to prepare in advance for any changes to fiscal policy that are likely to take place in the run-up to next year’s election.

Overall retail sales rose by just 0.2% in June, missing the market’s prediction of a 0.5% increase. One of the largest levels of underperformance was in the auto sector, where volumes were marginally up, but the sector is suffering from some price deflation.

Despite the Fed driving rates from close to zero to their current level of 5%, consumption is not in danger of collapsing.

The trend in retail sales remains above the pre-Pandemic normal.

However, there was a double-edged sword in the data that will potentially set off alarm bells at the Fed. Online sales saw strong growth last month, up a seasonally adjusted 1.9%.

This is a positive outcome for Amazon, the country’s largest online retailer, but the threat of a strike by UPS drivers casts a huge shadow over the sector as a whole, and concerns are growing as no resolution is close currently.

Powell is in line to be hailed as one of the most successful Fed Chairmen ever, provided he can deliver the soft landing that is now becoming a distinct possibility. He deserves immense credit for having stood up to a barrage of criticism from both Congress and industry over the past year and still must carry the stigma of having been appointed by Donald Trump.

The dollar index appears to have recovered some of its poise, although it remains close to its lowest point in well over a year.

Yesterday, it rose to a high of 100.10 and closed at 99.94, having earlier fallen to a low of 99.56.

ECB Chief Economist, Philip Lane, spoke yesterday of his view that it is hard to disseminate what is normal any more after more than ten years in which the Central Bank was forced to pump very high levels of liquidity into the market to support economies struggling with the aftermath of the financial crisis only to have to then drain that liquidity, and more, in order to fight inflation which had become close to getting out of hand.

Lane acknowledged formulating monetary policy for twenty highly diverse economies when each has its own ideas on fiscal policy is close to impossible.

He went on to say that the conversations that are held around the table at the Governing Council Meetings make every decision that is taken contentious for one reason or another.

There have been calls for the Governing Council to be “whittled down” to a more manageable size, with representatives from Eurozone member states taking turns to attend, in much the same way as is seen at the FOMC in the U.S.

That will “fly in the face of the European Union’s view that every decision that is taken be agreed by a majority of members.

As things stand, the vote that is taken next week to hike interest rates by a further twenty-five basis points will be as hard-fought as several of the previous votes have been.

There was a small “chink of light” for the doves yesterday, as Klaas Knot, the Head of the Dutch Central Bank, said that it was less than certain that the current cycle of interest rate hikes would extend beyond the next meeting.

The renowned hawk spoke on Dutch television of his belief that there will certainly be a hike next week, but beyond that, “nothing is certain.”

His remarks left the market unsure about where the highest point for interest rates would be. Christine Lagarde spoke recently of her view that rates will not become restrictive on demand until they reach 4%, but Knot’s remarks call into question if they will even reach that level.

The point at which rates become restrictive is something of a moveable feast since every one of the twenty individual Eurozone economies reacts differently to tougher monetary policy. It is certain that in some countries, rates are already restricting demand and forcing CFOs to rethink investment plans for the coming year, given increased interest costs on theory borrowings.

The Euro looks like it may be running out of steam after an exhaustive climb to a high of 1.1275 yesterday. It rapidly retreated to a low of 1.1208 and eventually closed at 1.1228.

Have a great day!