19 November 2024: Starmer and Reeves face another black hole

Several of the country’s business bodies want the Government to try to rekindle a relationship with Brussels to allow them to rediscover export markets despite the rigours of Brexit.

The UK’s departure from the European Union was always far more about individual opinions than those of the business community, and even if there are significant opportunities to be explored in the “wider world” it makes no sense to ignore what is on the doorstep.

Nigel Farage is trying to leverage his relationship with Donald Trump to push the UK towards closer ties with the U.S. Still, in truth, people are still determining if the threat of tariffs being placed on U.S. imports will apply to the UK, special relationship or not.

The President-elect’s plan to impose a 60% levy on Chinese goods and a 20% tariff on all other imports “presents challenges” for the UK government, according to the Centre for Economics and Business Research (CEBR).

The CEBR estimates that, if implemented without retaliation, these tariffs could lower UK GDP by 0.9% by the end of Trump’s term, equating to a £20bn impact based on 2023 economic data.

It noted that the most effective way to avoid this economic hit would be to secure a free trade agreement with the US, though ongoing disputes over food standards make such a deal unlikely.

Instead, it urged UK ministers to strengthen the country’s leadership in green technology as a countermeasure against Trump’s potential reversal of Biden’s Inflation Reduction Act (IRA).

Several of Britain’s biggest retailers have warned Rachel Reeves that her plans to hike National Insurance will cause staff to be laid off and shops to be shut.

Major companies including Tesco, M&S, Boots and B&Q have written to the Chancellor saying that job losses were now “inevitable”, as a result of the “sheer scale” of the new costs on business.

In a letter from over 70 companies, Ms Reeves was told that the sector faces £7bn in increased costs as a result of changes to employers’ national insurance, a higher minimum wage rise and levies on packaging.

They say: “For any retailer, large or small, it will not be possible to absorb such significant cost increases over such a short timescale.

Reeves is also facing personal issues with her past career being questioned by reporters.

Rachel Reeves has been “straight with the public” about Britain’s accounts and “restored financial stability”, No10 has insisted, amid claims the Chancellor exaggerated her CV.

Reports emerged this weekend that Reeves had inflated the length of her service at the Bank of England in an interview in 2021. This is a story that is likely to “run and run” with Fleet Street unlikely to give her any benefit of the doubt.

After appearing to have found a base on Friday, Sterling saw its first gains for more than a week against the dollar yesterday. It rallied to a high of 1.2686 and closed at 1.2676.

Jerome Powell insists that the U.S. economy is in a condition that will allow the Fed to “take its time” in cutting rates, while several Wall Street banks insist that the FOMC will vote to cut rates by at least twenty-five basis points at each of its next four meetings.

Core inflation, which excludes volatile food and energy, rose 0.3% month on month in October. This was the third consecutive month that underlying inflation has risen at this pace, taking the three-month annualized rate to 3.6%, well above the Fed’s 2% target.

Markets had scaled back expectations over the speed of Fed easing after Powell said the path toward lower inflation could be “bumpy” and the strength of the economy meant there was no “hurry” to lower rates. Nonetheless, the market does not believe either the inflation release or Powell’s remarks have markedly changed the trajectory of monetary policy.

The key issues facing the FOMC are inflation, which has become “sticky” recently, and housing costs. The latter is masked from the CPI data since it is not included, while in the Fed’s favoured measure, Personal Consumption Expenditures, and rental costs are factored in.

The Market expects Trump to get his way, and rates will continue to fall over at least the first quarter of 2025.

Trump has promised a “manufacturing renaissance” upon his return to the White House, pledging tariffs to bolster companies that make products in the United States. This will almost certainly see manufacturers’ costs escalate as both materials and labour are included.

It remains to be seen how the new Administration will deal with the introduction of tariffs if they are seen as more of a bargaining tool and what reaction will be seen from countries that export to the U.S., particularly China.

As a minimum, China may well expect the U.S. to pay more to borrow medium and long-term funds from the market since it will no longer have any advantage from its trading relationship.

In a recent report, Morgan Stanley outlined three possible drivers for the Fed over the next eighteen to twenty-four months.

A “hard landing,” where the Fed overtightens (or at least cuts less), and GDP contracts in 2025; a “re-acceleration,” where rate cuts fuel economic growth; and “China reflation,” in which U.S. inflation slightly increases due to more expensive imports.

Trump’s influence may make the first scenario a non-starter, while the other two are eminently possible.

Quantitative tightening is expected to end in the first half of 2025, this will see fiscal policy become more supportive. However, the great unknown will be the employment data, which has become more volatile of late.

The dollar’s recent rally has come to a halt as the Greenback entered overbought territory. This has not led to a significant correction, mainly due to Powell’s recent comments.

The dollar index fell to a low of 106.13 yesterday and closed at 106.20.

The seemingly endless flow of speeches from FOMC members will continue over the next few days before Washington and New York begin to empty for next week’s Thanksgiving Holiday.

Christine Lagarde has abandoned her concerns over rising inflation to concentrate on the problems associated with a lack of growth in the economy.

Since the rest of the Eurozone is having to do a great deal of heavy lifting since Germany is suffering problems, Lagarde believes that the European Union should pool its resources in areas like defence and climate as its productivity growth falters, and the world fragments into rival blocs.

She went on to say that Europe is falling behind in innovation and productivity compared to the U.S. and China. The EU specializes in outdated technologies, only 4 of the world’s top 50 tech firms are European.

A lack of a unified digital market and venture capital investment hinders technological progress, while global trade fragmentation is a threat to Europe.

Trade fragmentation and competition with China threaten Europe’s open economy, the EU’s declining world trade share and increased reliance on foreign venture capitalists for tech funding.

Slowing productivity growth reduces tax revenue potential, threatening funding for pensions, climate, and defence needs, and an estimated €1 trillion annually is needed for climate, innovation, and security investments.

The euro area trade surplus increased notably in September as exports to the United States surged ahead of the Presidential Election that saw Donald Trump winning the race.

The trade surplus rose to EUR 12.5 billion in September from EUR 9.8 billion in the same period last year, data from Eurostat reported yesterday.

Exports grew 0.6% on a yearly basis, offsetting the 2.8% decline in August. Meanwhile, imports dropped 0.6%, following the 2.7% fall in the previous month.

Shipments to the US grew 8.9% and imports from the US fell 4.9%. As a result, the trade surplus with the US increased to EUR 18.4 billion from EUR 13.3 billion a year ago.

The victory of Donald Trump in the US presidential election is likely to pose challenges to the EU exporters.

A study conducted by the IFO Institute on behalf of the Chamber of Industry and Commerce has revealed that the German economy is losing 146 billion euros in annual economic output due to excessive bureaucracy.

This figure is more than twice as high as an earlier assessment from the German National Regulatory Control Council, which estimated the direct costs of bureaucracy at 65 billion euros per year.

“The large scale of the costs caused by bureaucracy illustrates how urgently reforms are needed. The costs of doing nothing are huge when measured against the untapped growth potential from reducing bureaucracy,” said Oliver Falck, Director of the IFO Centre for Industrial Organization and New Technologies.

This will be another issue that the new German Government will need to prioritize when it takes office following the election, which is slated to happen in the Spring.

The Euro began to recover yesterday, having bottomed out on Friday. It rallied to a high of 1.0607 and closed at 1.0595.

Once the political machinations on both sides of the Atlantic have run their course, the market will be able to return to the prospects for inflation and looser monetary policy will return, giving the dollar another advantage.

Have a great day!