25 October 2024: EY cuts its growth prediction

The fact that one of the big three accounting firms has cut its prediction for the UK economy in a week when the IMF has raised theirs perfectly illustrates the uncertainty caused by the government’s economic policy.

Since coming into office in July, Rachel Reeves has not tired of telling anyone who will listen about the issues she inherited. Next week, she will present her first budget, and she will have the chance to begin recovering.

The IMF’s upgrade was based upon the budget being positive for investment, while EY is looking more at the current situation “on the ground”.

The comparison with Liz Truss’ and Kwasi Kwarteng’s “rush for growth” couldn’t be more stark, but it remains to be seen if Reeves has a similar effect on financial markets.

Her announcement that she is planning to change the self-imposed rules on government borrowing has driven concerns among the more conservative City institutions, while former Chancellor, Jeremy Hunt, has accused her of “cooking the books” to achieve her goals.

Even before she delivers the tax increases that she strived so hard to deny during the election campaign, her Party’s massive popularity has been eroded, and the two main parties are apparently neck and neck.

While the Prime Minister and Ms Reeves say they are not politicians to court popularity, both will be concerned about the effect of tax increases and spending cuts have on the country’s morale, since they came to power under a banner of change.

The forecast by the EY ITEM Club indicates a more restrained economic expansion for the UK in the coming year, with GDP growth now set at just 0.9%. This marks a decrease from the earlier prediction of 1.1% growth, according to the Autumn Forecast, which suggests a cooling of economic expectations.

This revision stems primarily from lower-than-anticipated consumer spending. Consumers are spending less, which is affecting overall economic growth. Such consumer behaviour signifies a broader trend that may have repercussions for various sectors reliant on spending to drive growth.

Additionally, the updated forecast reflects the impact of cautious reductions in the Base Rate. These conservative measures have been taken to stabilize financial conditions yet appear to have tempered growth forecasts in the process.

Balancing financial stability with growth is still a delicate undertaking for policymakers.

The country is “holding its collective breath” ahead of next Wednesday’s event and the market is unsure of the short-term effect, although Reeves is still being considered as providing long-term stability to the economy.

Yesterday, the pound regained some of the losses it had suffered recently. It rallied to a high of 1.2988 and closed at 1.2975.

There are concerns on Wall Street that the Fed may have done the unthinkable and committed a policy error in cutting rates by fifty basis points at the meeting of the FOMC before last.

By “taking a chance” on weaker-than-expected employment data in July, the cut in the Fed funds rate may have been more aggressive than was at first intended. It seems that the effect of a fifty-point cut is not the same as two twenty-five-point cuts in the market’s eyes.

In making up for lost time, the Fed gave the markets the impression that it was concerned about the true state of the economy.

Concerns have been reflected in comments made by FOMC members since the most recent meeting of the rate-setting committee, at which rates were left unchanged.

Federal Reserve Bank of Cleveland President Beth Hammack said that while progress on lowering inflation had resumed in recent months, officials aren’t yet ready to declare their mission accomplished.

Meanwhile, Trump-supporting TV Network Fox News reported that Jerome Powell may be forced to resign over the perceived gaffe.

Some Wall Street commentators believe that the economic estimates by the Fed are completely wrong, and it’s starting to hit the stock market. Powell was overly dovish going back to the Fed Jackson Hole meeting in August.

This is not a generally held view and is most likely a response to Trump’s recent poll gains, which put him in the lead over Democrat Candidate Kamala Harris for the first time since it was announced that Joe Biden would not be standing for re-election.

While Harris was the front-runner, the Trump campaign was dismissive, saying that the results in the swing states like Georgia and Pennsylvania matter most. They are singing a different song now.

Concerns over the jumbo rate cut are unlikely to go away until another story breaks, but they will drive the market’s focus on the October Employment report, which is due to be published next Friday.

The data will be released unusually on the first day of the month. This will probably mean that the report will contain several estimates, although it will not be reported which numbers they relate to.

The dollar index took a breather yesterday but is not showing any signs of running out of steam.

It fell to a low of 104.01 erasing Wednesday’s gains and closed at 104.03

Christine Lagarde, speaking in Washington yesterday, spoke of her concerns about trade restrictions, in a speech which was driven by both her worry over tariffs on U.S. imports expected to be introduced should Donald Trump win the upcoming election and her newfound support for the Draghi Plan for productivity growth in the Eurozone.

Lagarde fears that trade barriers and restrictions hold back prosperity. “The times when the United States has been in strong leadership, and when the economy has been prosperous, have most often coincided with periods of trade around the world and engagement of the country,” she said at an event hosted by the Atlantic Council in Washington, D.C.

“So, we are not in a world where trade stops and trade declines. We are in a world where trade continues. But it continues differently,” she said. “And I think we have to be attentive to the composition and the distribution; so not less trade, but trade with other partners, trade in a different risk distribution, if you will.”

She highlighted Draghi’s report on the future Eurozone competitiveness. A key focus of the report is the demographic challenge Europe is facing.

With an ageing population and a shrinking workforce, the report emphasizes the need for policies that support higher birth rates and attract skilled immigrants.

Draghi highlights that without addressing these demographic shifts, Europe risks a significant decline in its economic dynamism and innovation capacity.

The “immigration issue” is a concern that runs far and wide throughout the region.

While German Chancellor Olaf Schmidt is in favour of opening the Eurozone’s borders to more economic migrants, the French President takes a more protectionist stance, claiming that more immigration will lead to more widespread unemployment.

He is believed to be of the opinion that Germany’s stubborn refusal to accept the systemic change that has run through the region is at the core of Germany’s economic issues that are driving it into recession.

France also has a multitude of issues of its own. Its fiscal issues, which mirror what may happen in the U.S., have already begun in Paris.

The revolt over fiscal deficits has come for France.

This financial market freak-out is pushing the government to take steps to rein in spending, a task complicated by political factions that campaigned on expensive promises. The key lesson right now is that you cannot have unfunded spending. This was a lesson that was quickly learned by Liz Truss and Andrew Bailey.

The French economy is faltering after an extended period of high interest rates. The French have little appetite for fiscal belt-tightening, as demonstrated by last year’s protests over raising the retirement age.

The Euro gained yesterday for the first time in almost two weeks. It rallied to a high of 1.0830 and closed at 1.0827.

Next week will see the start of a period of turbulence for the markets, in which the euro, while on the sidelines, may well become involved in the expected volatility.

Have a great day!