24 January 2025: Reeves may ease her “non-dom” crackdown

There is a growing feeling within the financial markets that the Bank of England could cut the base interest rate by fifty basis points when its Monetary Policy Committee meets in the first week of February.

The Committee’s newest member, Alan Taylor, raised the subject of a larger-than-expected rate cut a couple of weeks ago, and this idea is beginning to take hold.

With predictions of up to one hundred and fifty points of interest rate cuts by the end of the year, Goldman Sachs warns of a slowing economy and rising inflationary pressures. Markets may be underestimating the scale of change ahead by beginning to believe that the Bank could “front load” rate cuts to stimulate the economy and dispel stagnation fears.

The investment bank’s analysts think policymakers might adopt a more assertive approach even as inflationary pressures continue, and economic growth slows.

These forecasts reinforce the markets’ underestimation of the possible size of prospective rate reductions. The Bank of England is facing increasing difficulties in balancing inflation control and economic stability, with a possible shock in store as early as February 5th.

Even as Rachel Reeves trumpets her success in attracting new investment in the country, the situation on the ground is showing no sign of improvement. The latest jobs data shows that unemployment is beginning to rise, which is a “double negative” for the economy. Benefit payments will increase as more people are out of work, while they will also be not contributing to a hoped-for rise in tax revenue.

Reeves faces pressure to reverse the most radical of the proposals from her budget. The increase in employers’ national insurance contributions is “set in stone” but the chancellor is believed to be considering softening the effect of her decision to do away with the non-dom tax status since she is alarmed at the negative effect it is having on the wealthy.

While some weakness is likely related to expectations for a negative employment effect from the upcoming national insurance increase, there are now notable signs of underlying cooling, which should weaken pay pressures over time.

Reeves has signalled she will ease Labour’s crackdown on non-doms amid alarm at the exodus of millionaires from Britain.

The Chancellor told a fringe event at the World Economic Forum in Davos that she was ‘listening’ to the concerns.

An amendment is expected to be tabled to the Finance Bill. The mooted change is thought to relate to the temporary repatriation facility, which allows those registered to bring money into the UK.

The pound has been principally driven this week by market expectations of the effect of President Trump’s economic policies on global markets.

Yesterday it rallied to a high of 1.2375 as the previous day’s fall was reversed, and it closed at 1.2354.

Members of the rate-setting Federal Open Market Committee are increasingly favouring individual statements on their attitude to monetary policy and doing away with the Fed Chairman’s single voice approach which has largely driven the market’s attitude to rate cuts over the past three months.

However, the dearth of public comment from FOMC members recently has led market commentators to rely on their own opinions.

The expectations for the February FOMC meeting vary from an absolute certainty that there will be no rate cut, to some seeing the Fed performing a “pre-emptive” strike, cutting rates by fifty basis points for the second time in the current cycle.

This is a weird time for the U.S. economy. On the surface, it’s humming. Unemployment is a low 4.1%, growth is strong, consumers are spending, start-ups are booming, and inflation has cooled. But many Americans are loath to change jobs.

There was a period not so long ago when the market was significantly “tighter” that workers could change jobs and expect a significant “bump” in the basic wage as well as bonuses agreed in advance.

Hiring is anaemic, and companies are giving fewer bonuses and promotions. Moving is nearly impossible because, so few homes are for sale, and no one wants to trade their 3% mortgage rate for 7%.

Americans are even keeping their cars for record amounts of time. All of this is part of a phenomenon that has been dubbed the “Great Stay,” where people feel cemented in place.

Consumers are the lifeblood of the U.S. economy, accounting for more than 70% of GDP. They have been reluctant to spend on big-ticket items ahead of the change in President and are now waiting to see the effect of Trump’s policies.

Many people, especially if they enjoy their current lifestyle, are happy to continue to simply “live”, but for anyone feeling restless, it’s tough.

Young workers have started saying they have “resenteeism” at work: They don’t like their jobs but are reluctant to quit. This is a big shift from 2021 and 2022 when jobs were plentiful, and it was easy to quit and find a dream job that offered more money and flexibility.

There are currently seven million people registered as unemployed, and many are finding it tough to even get an interview, let alone find a job.

It is the “American way” for the workforce to always strive for more but as life expectancy grows more people are looking forward to retirement than advancement and having to be satisfied with a job, not a career.

The dollar traded well on the defensive on Thursday as investors continued to wait for further clarity on recent announcements by President Trump, particularly regarding tariffs.

The index fell to a low of 107.92 yesterday and closed at 108.14.

Europe’s “laziness” and inherent aversion to risk-taking are largely responsible for the bloc’s economic decline, European Central Bank President Christine Lagarde told world decision-makers at the annual gathering in Davos, Switzerland.

In a speech that is unlikely to have endeared her to the majority of hard-working Europeans, Lagarde said “We have a lot of assets, but we’re shooting ourselves in the foot many times because we don’t complete the work we set out to do,”, urging EU leaders to deepen the single market by removing barriers to trade and investment.

Lagarde said she hoped the re-election of Donald Trump as US president would serve as a “wake-up call”, and reverse European indolence.

It is plain that she favours the adoption of the suggestions made by her predecessor, Mario Draghi in his report to Ursula von der Leyen, but there needs to be not just the will but the personality within Brussels to see his proposals through.

The European Union has now been around for long enough for its members to see that just being “members of the club” is not enough to guarantee prosperity. It is without question that such a union has distinct advantages, but diplomats and statesmen need to step up to drive forward and ensure that those advantages do not wither on the vine.

As the region’s two largest economies appear to be on a path towards periods of stagnation, it is likely to be another year of moderate growth in Italy, driven by private consumption.

Investments are likely to be more mixed, with opportunities hinging on an acceleration in spending of EU recovery funds. Fiscal discipline will help in consolidating credibility, not economic growth.

After outperforming in the post-Covid period, the Italian economy is now aligning with the euro area average. In the third quarter of 2024, GDP growth was flat, +0.4% year-on-year, with a strong positive contribution from private consumption offset by a significant drag from net exports.

Supply-side data confirmed that manufacturing remained a hindrance, placing the burden of growth on the services sector.

The fourth quarter should not bring about substantial changes to this pattern. A resilient labour market, with the unemployment rate at 5.7%, its lowest since the birth of the Euro, in November, yearly wage growth hovering at 3.8% and inflation averaging at 1.4% over the quarter remain favourable conditions for further gains in real disposable income, potentially supporting consumption.

German Vice-Chancellor Robert Habeck echoed several of The ECB President’s sentiments in a speech yesterday. He noted that the overriding sentiment in the region is for Trump’s threats to “blow over, and we can go back to our normal sedate (lazy) way of life.”

The euro may be cementing its medium-term floor, although it may well be subject to further shocks from the new U.S. administration. Yesterday, it saw an increase in volatility, although it closed at 1.0417, just five pips higher than its opening level.

Have a great day!