22 January 2025: Reeves is set to back airport expansions

Wage growth in the UK continues to outpace inflation. In the three months to November 2024, wages grew at an average rate of 5.6%. The latest figures, published yesterday, also showed that the labour market is showing obvious signs of cooling.

Uncertainty around the Budget, and some unwelcome news around rising taxes for employers, could be playing a part in keeping a lid on employment, which fell over the quarter.

The data provides a mixed message for the Bank of England Governor, Andrew Bailey, who spoke recently of a change in the focus of the MPC away from fighting inflation, to looking at promoting economic growth. She said that job creation would rank alongside rising prices in the Bank’s deliberations.

Bailey’s colleague, Alan Taylor, commented recently that the Central Bank should be considering pre-emptive rate cuts in a move to head off the economic weakness that rising unemployment may signal.

Taylor, the most recently appointed member of the Bank’s monetary policy committee (MPC) said the UK is “in the last half mile on inflation”. He believes that cutting rates now would lead to a soft landing for the economy.

Taylor voted for rates to be cut in December, along with fellow independent member, Swati Dhingra, and the Bank’s head of markets and banking, David Ramsden.

Chancellor Rachel Reeves is reportedly preparing to support significant airport expansion plans at Heathrow, Gatwick and Luton, following the Government’s rejection of recommendations from the Climate Change Committee (CCC) to pause such projects.

The plans include a third runway at Heathrow, a second runway at Gatwick, and a near doubling of Luton Airport’s capacity. Reeves is expected to announce these developments later this month.

The Government’s plans have sparked criticism from environmental groups and advisors, who warn that such expansions could derail the UK’s climate commitments. Not only would these expansions bring worse air pollution and noise disturbance for local people, but approving them would also contradict the Government’s climate advisors, who say that expansion should not go ahead without a proper national plan to curb emissions from the sector and manage passenger numbers, according to protest groups.

In an interview with the Financial Times, prominent economist Ray Dalio warned that the government faced the prospect of having to borrow increasingly from financial markets to service its existing debt.

“When you get to the point that you have to borrow money to service the debt and interest rates are rising, so that debt service payments rise, so you need to borrow more money to pay them, you’re in what the markets call a death spiral,” he said.

The pound lost ground initially yesterday but recovered to close marginally higher at 1.2339.

It is hard to imagine a single day in the coming four years when Donald Trump will not warrant a mention in financial market commentaries.

Yesterday, told reporters that he was considering tariffs on imports from two of the country’s largest trading partners as soon as February 1st. Goods from Mexico and Canada would attract twenty-five per cent tariffs.

He is also said to be considering a ten per cent tariff from the same data on Chinese imports.

The move, while controversial, is also not receiving unanimous approval from economists.

Trump’s plans will likely attract significant retaliation from China in particular, although he has tempered his plans, announced yesterday, stating that he wants to curb the flow of illegal immigrants from Mexico and drugs from Canada.

The Federal Reserve has pulled out of a coalition of central banks formed to tackle climate change risk in the financial sector.

The Network of Central Banks and Supervisors for Greening the Financial System was launched in 2017 to share best practices and contribute to the development of environment and climate risk management in the financial sector.

This coincided with Trump announcing that the U.S. would withdraw from the Paris Accord on climate change, in a move that repeated his 2017 withdrawal. Trump also signed an executive order to begin the process of withdrawing the US from the World Health Organization (WHO).

Consumer prices for goods have diverged from those for services. While goods prices had been declining due to the resolution of pandemic-related supply-chain issues, they have recently stabilized or even increased. In contrast, prices for services, particularly in healthcare and car repairs, have generally risen due to higher labour costs and auto prices.

Inflation is still causing concern within the FOMC, although it is expected that the rate-setting committee will vote for a twenty-five-point rate cut next week. A plethora of Fed Presidents spoke last week, and their overriding feeling was that inflation would reach their two per cent target this year.

Michelle Bowman and Christopher Waller are two permanent committee members who retain hawkish tendencies and favour a greater degree of caution until inflation reaches its target.

The two are sure to consider voting against a cut next week since there is a high degree of uncertainty surrounding the President’s plans for the economy.

The dollar index continues to lose ground in a classic “sell the fact” move. Yesterday, it fell to a low of 107.87 and closed at 107.95.

A lot has been said about the parlous state of the Eurozone’s largest economy, but the Union’s second-largest economy, France is in a similar state, but in a reaction that is typically French, the country when faced with difficult choices, prefers to do next to nothing.

According to one of the world’s most pre-eminent economists, France is hurtling towards an economic crisis and must get its finances to stop it.

Olivier Blanchard, a former chief economist for the International Monetary Fund, told reporters that successive governments have made France dangerous by not making politically unpalatable decisions to balance its budget.

France entered the new year for the first time in its modern history without a proper budget after lawmakers ousted Prime Minister Michel Barnier in opposition to his plans to bring down the country’s massive budget deficit, which came in at 6.2 per cent of gross domestic product last year.

Barnier’s successor, François Bayrou, is also prioritizing deficit reduction, but has put forward slightly less ambitious tax hikes and spending cuts to get more lawmakers on board.

Blanchard said that Bayrou’s government “has done more or less its best, but its best is not much and is not sufficient.” He added that the current gridlock, in which no political group holds a majority in parliament, isn’t helping.

“For now, French parties are not ready to accept something necessary,” he said. “It will take a budget crisis, maybe a financial crisis, for parties to sit down and say we’re going to do something.”

Isabel Schnabel’s recent warning that a trade war between the U.S. and Europe is brewing has not been lessened by Donald Trump’s first day in office. The European Commission is waiting to find out what Trump has in store for it.

Trump may likely use tariffs on U.S. imports from Europe as a blunt instrument to force European Nations into increasing their NATO budget contributions closer to the five per cent of GDP that he desires, from the current level of two per cent of their combined GDP.

Trump has already singled out Denmark in an effort for it to cede control of Greenland to the U.S. Trump believes that the world’s largest island is of vital strategic importance to the U.S.

Investor confidence in Germany’s economy fell more than expected before next month’s snap election, underscoring persistent doubts about the country’s ability to escape its current bout of stagnation.

The ZEW Institute’s index of expectations dropped to 10.3 in January from 15.7 in December, more than economists had forecast.

“A lack of private household spending and subdued demand in the construction sector continues to stall the German economy,” ZEW President Achim Wambach said Tuesday in a statement. “If these trends continue in the current year, Germany will fall further behind the other countries of the Eurozone.”

The euro is now performing positively after its prolonged fall in the run-up to Trump’s inauguration. Yesterday, it rose to a high of 104.35 and closed at 1.0420.

Have a great day!