25 November 2024: Growth is expected to stay sluggish

The Government is in danger of wasting its first six months in office as the country begins to lose faith in its ability to effect real change to its economy and social structure.

The Prime Minister is suffering the most rapid fall in popularity of any Party Leader in the past 100 years. His approval rating is below those of both Kemi Badenoch and Nigel Farage; one has just started in a new role, while the other has spent most of the past six weeks in the United States.

The Labour Party is leaning heavily on its eighty-odd seat majority as, almost without fail, Cabinet members trot out what have already become jaded tales of how they have been forced to implement unpopular policies due to the previous administration’s incompetence.

When Labour came to power, no one, either MPs or the public, was under any illusion about the scale of the task that lay ahead. However, to ensure their victory Keir Starmer and his senior colleagues felt compelled to tell some half-truths about their taxation plans and the need to repair the black hole in the nation’s finances, which, even now, the public has not been provided with solid evidence about its size.

The Prime Minister appears to be a little overawed when meeting overseas Heads of Government, and his overtures towards climate change, the G20 and European Union have come across as lukewarm.

He remains committed towards the support of Ukraine in its war with Russia, even though it is a war that Ukraine cannot win, and it is becoming increasingly likely that it will need to enter negotiations with Moscow, which may mean the loss of some territory that has already been taken by Vladimir Putin’s soldiers.

The approval of the use of British medium-range missiles to strike targets inside Russia has seen a dangerous escalation in the war. The approval of Biden to use such weapons would have been unlikely to have happened under the new U.S. Administration which takes over in January. While trying to look decisive, Starmer has aligned himself with Washington even though he is trying to “perform a reset” of the UK’s relationship with Brussels.

His Chancellor while trying to sound and act tough has left herself exposed to gossip about several parts of her CV which has led to MPs having ammunition to attack her around her recent budget which was “packed full” of unpopular measures and policies which appear to be gambles, particularly regarding the sustainability of GDP.

Following the increase in employer’s National Insurance contributions, Rachel Reeves has come in for severe criticism from employers’ groups which have told her that their ability to take on new workers to expand and grow their businesses will be severely hampered by the additional taxes.

Even the Head of MP’s most trusted think-tank told reporters recently that he was astounded by the level of tax increases in the budget, given the pledges made in the Labour Election Manifesto.

Public sector borrowing has risen over the past three months as the settlement of industrial action by junior doctors, train drivers, and civil servants has taken place with Reeves again abrogating responsibility by saying that the increases were what were suggested by independent review bodies, despite those review bodies not being party to the Treasury’s models of the nation’s finances.

Last week, saw inflation tick up from 1.7% to 2.3% year-on-year, which will almost certainly lead to the Bank of England leaving rates on hold at its next meeting, which will deal a blow to the country’s growth prospects heading into the New Year, while retail sales fell to -0.7% in October from a downwardly revised 0.1% in September.

This week, there is no tier-one data due for release, although MPC members Clare Lombardelli and Swati Dhingra are to make speeches.

The pound has been battered by the strength of the dollar since the Presidential election, although the likely pause in rate cuts saw it form something of a base last week. It fell to a low of 1.2485 and closed at 1.2530.

President-Elect Donald Trump could never be accused of dithering over a decision, so the delay in his naming of a Treasury Secretary has driven the financial markets to understand the seriousness with which he considers both the post and the incumbent’s influence over economic policy.

During Biden’s Presidency, the outgoing Treasury Secretary, Janet Yellen, appeared to have a similar role to the vice president in which she was “seen but not heard”.

Trump wants his Treasury Secretary to have a much more prominent role in the economic decision-making process, as there will be significant changes to fiscal policy, particularly taxation.

It remains to be seen how much of the Fed’s independence he is likely to remove, although the idea that Trump himself will have the final say on changes to monetary policy is unlikely to come to pass since Fed independence is close to being enshrined in the constitution.

The incoming president has all but completed the assembly of his Cabinet now, and it is clear that he values loyalty over experience.

The announcement that Trump’s long-anticipated pick for Treasury Secretary will be hedge fund manager Scott Bessent is being received well by business leaders and markets, who are reassured that Bessent finally emerged on top after a selection process and jockeying with top candidates.

Several Wall Street CEOs had been on edge over the last couple of weeks as Trump’s search for Treasury Secretary remained unfinished, raising different sets of concerns about other contenders. By far, Bessent, a global macro investor, was the only contender who CEOs viewed as qualified and competent and able to work constructively with Trump.

The business community expects Bessent to reach out and work closely with business leaders, as well as policymakers from both sides of the aisle, to create economic growth and usher in the “golden age” of American economic opportunity Trump touts.

Trump’s picks for several other key positions such as health and education have raised eyebrows, although his pick for Attorney General Pam Bondi was not his first choice since Matt Gaetz withdrew from the race, not being able to stand up to public scrutiny.

Although FOMC officials are playing down the likelihood of a rate cut at their December meeting, the economic data published so far does not preclude such a move.

The November employment report may be pivotal. The market expects that there will be an upward revision of the headline number since the October report was published on November 1st, which did not allow time for all the data to be collated, and several estimates were used, although it could turn out that the headline number was even worse than reported.

The dollar and asset markets continue to rally following Trump’s victory, which is business-friendly.

Data for manufacturing output was published on Friday, and although manufacturing is still in contraction, the rally to 48.8 was in line with market expectations.

The dollar index saw another week of significant gains, rising to a high of 108.07, its highest since November last year. It closed at 107.53.

The ECB does not feel that it needs to slow the pace of interest rate cuts because the Fed is expected to pause its cycle of rate cuts in December, according to ECB Governing Council Member and Banque de France Governor, Francois Villeroy de Galhau,

Tariff hikes under the new Trump administration do not shift the inflation outlook in Europe, de Galhau said on Thursday, urging the European Central Bank to keep its options open.

The balance of risks to growth and inflation are shifting to the downside, and possible U.S. tariffs are not expected to alter significantly the inflation outlook in Europe,” Villeroy said in a speech in Tokyo.

His comments were a relief to the market, which had been developing increasing concerns since other ECB officials, most notably, The Bank’s President, Christine Lagarde, had been becoming more concerned about the introduction of tariffs on U.S. imports from Europe.

Bundesbank President, Joachim Nagel, expressed his confidence that the strong ties between Germany and France will continue even if they are threatened by the introduction of tariffs.

The concern is that should Donald Trump introduce tariffs, in particular on the automotive sector, European car manufacturers will see them as driving an “every man for himself” attitude.

In general, Nagel told Die Zeit that Trump’s promised tariffs on certain goods and services from the European Union could cost Germany 1% of its gross domestic product (GDP) and push its economy into contraction.

Overall, Nagel noted that core inflation in the Eurozone is still too high and facing pressures, especially in services.

Recently, the policymaker urged the ECB to be cautious about making any new decisions on interest rates and wait for the incoming data.

Christine Lagarde launched a blistering attack against the “vested interests” that she said had left the EU facing “death by a thousand cuts”.

The ECB President warned that successive attempts to streamline the myriad rules and regulations within the EU had repeatedly been blocked. That in turn allows the project to suffer as vested interests oppose or dilute each piece of legislation, she said in a speech at the European Banking Congress.

Europeans were already poorer than their American counterparts following decades of cautious investment choices and fragmented markets, Ms Lagarde warned.

“European households are much less wealthy than they could be. Since 2009, US household wealth has grown by around three times more than that of EU households,” she said.

Ms Lagarde warned the technology gap between the US and EU was now “unmistakable” as she called a simplification of investment rules as “the missing link for Europeans to turn their high savings into greater wealth”.

The dollar’s strength following the election has driven the Euro to a two-year low. It reached 1.0332 but rallied to close at 1.0414.

Have a great day!