19 July 2024: Labour has inherited an economy “on the up”

The new Government in the UK appears to be “getting its retaliation in first”, by claiming that it has inherited an economy that was at its lowest ebb since the war.

The truth of that appears to be masked by the economic data that has been published in the two weeks since the Labour Party won its landslide victory.

Of course, its Ministers are entitled to “gild the lily” by predicting following this week’s State Opening of Parliament that it will “fix” the economy, but in truth, it was showing signs that the recovery, as Rishi Sunak said many times during the campaign, had been well underway since the beginning of the year.

There have been several notable achievements already which were highlighted in the King’s Speech.

For example, the first group of undocumented migrants were returned to France by the Border Force yesterday, while the Prime Minister has already begun to forge stronger links with the European Union by hosting a gathering of forty-six leaders from across Europe.

Starmer was pictured in deep conversation with French President, Emmanuel Macron, with whom he shared a similar political outlook even if their governments are on a vastly different path currently.

In this speech at the gathering, the term “reset” was used on several occasions to describe the current positions of both London and Brussels.

The latest employment report published yesterday illustrated why there is pressure on the Bank of England to cut interest rates. While the claimant count increased from 23.4k to 32.3k, showing that the jobs market is beginning to cool, it was wage data that showed that the Bank’s policies are working.

Average earnings both including and excluding bonuses rose by 5.7% in the three months to May, down from 6% and 5.9%, respectively.

This appears to confirm Andrew Bailey’s comments that the Bank does not have to wait for the core rate of inflation to fall close to its inflation target of 2% before beginning to cut rates.

Though the wage growth momentum slowed, it is still higher than what is needed to be consistent for achieving price stability. The vote at the next meeting of the MPC may well see the number of votes for a cut increase, but it still is a close call whether a cut will be agreed.

The market believes that a rate cut has come closer following the data. Sterling fell from its “lofty perch” achieved earlier in the week, making a low of 1.2944 and closing at that level. Versus the Euro, it also lost ground, falling to a low of 1.1871 and closing at 1.1879.

The only Tier One data due for release next week are the S&P services and manufacturing purchasing managers surveys, which are expected to show that output remains well above the level which denotes an expansion of the economy.

The more dovish economics departments of the major Wall Street banks are coming ever closer to pressing the panic button and calling for an immediate cut in the Fed Funds rate.

It seems that Jerome Powell is trying to find some consistency in the recent data releases, which have often been contradictory. For example, output data has been relatively weak for the past two months, while retail sales, the data for which was published earlier this week, showed an increase over last month from flat to a rise of 0.4%.

Powell has gone back to basics and is conforming with the Bank’s mandate. The Fed is “responsible” for employment growth and price stability.

While it is clear that the employment market is cooling, that is no bad thing since the creation of 200k plus jobs each month, while wages increase at well above the headline of inflation, does not create price stability.

There is no “magic number” to which the average number of jobs created needs to fall to see the FOMC agree to cut rates, but as inflation continues to fall, albeit at a slower-than-hoped-for rate, the two pieces of data will bring a rate cut ever closer.

It may well be that history will show that FOMC members were “overly hawkish” in predicting a single rate cut, or none at all, in 2024 since the slowdown in job creation has been going on since the beginning of the year and has accelerated since April.

Meanwhile, Powell has listened to all the rhetoric and come to a decision that a cut sooner rather than later would be preferable.

It may be a truism, but the later the first cut takes place, the larger the increment of each cut that will be needed.

Powell would do well to learn from when he needed to “apply the brakes” to the economy in 2022. If the first hike had happened sooner, he may not have needed such a violent “stamp” on the brake pedal.

The dollar index recovered some poise yesterday as it bounced off support at 103.80 and recouped almost all its losses from the previous day. The ECB’s decision to agree to a “dovish pause” clearly helped the index.

It reached a high of 104.23 and closed at 104.20.

Although Germany’s men’s football team failed to live up to its billing as one of the favourites to win Euro 24, the boost the tournament gave to its economy may provide at least some consolation and may have even stopped the country from falling deeper into recession.

Germany is still the sick man of Europe, a fact that is not lost on the right wing of UK politics, which continues to “celebrate” Brexit despite the Government seeing that closer ties with Brussels could be a path to a significant improvement in GDP.

It will be a few months before the ten host cities can tell if they have “reaped a harvest” of improved growth which will cover the cost of hosting the event.

German taxpayers are bearing the brunt of the costs of security, advertising and stadium renovations. Still, UEFA is already expecting a profit of over a billion euros from ticket sales, broadcasting rights and receiving tax exemptions worth millions.

To secure its bid, the German government also agreed to comprehensive concessions, including tax exemptions worth millions.

The exact figure is shrouded in secrecy, as the Finance Ministry, whose current Chancellor, Olaf Scholz used to be the minister in 2018 when the bid was made, considers it to be a “tax secret.”

Similarly, Paris is holding its breath, given the staggering cost of hosting the Olympics which it will struggle to get back immediately in financial terms, although a legacy from tourism is hoped to last for many years.

Despite the undoubted success of the tournament, economic sentiment in the country continues to fall.

According to the influential ZEW Economic Research Institute, the economic sentiment index fell to 41.8 points from 47.5 points in June, the ZEW economic research institute said on Tuesday. A poll by the Reuters news agency predicted, on average, that sentiment would fall to 42.3.

Either way, the data show that sentiment is at rock bottom, and it may well take more than one or two more rate cuts to see it improve.

Chancellor Scholz and his Finance Minister, Christian Linder, need to consider significant structural changes to the economy to reduce its reliance on energy-hungry heavy industry and switch to a more “services-led” economy.

Exports continue to fall as the country is struggling to compete with China. It has shown that the introduction of tariffs on Chinese manufactured goods is counterproductive.

The ECB, as expected, left interest rates unchanged yesterday, but left the door wide open for a cut in September when the Governing Council next meets.

In her address to reporters following the meeting, Christine Lagarde said that the Bank was studying the inflation picture “closely”.

The Euro lost ground as the market is convinced a cut will happen in September, no matter what the FOMC decides.

It fell to a low of 1.0893 and closed at 1.0896.

Have a great day!