26 February 2025: The NFU President takes a swipe at Reeves

The Prime Minister confirmed the influence that Donald Trump is having on the politics of the UK and Europe yesterday by announcing that he had decided to raise overall spending on defence to 2.5% of GDP by 2027.

Starmer will visit Washington tomorrow for meetings with President Trump. However, it is not yet clear what Trump’s reaction will be, even though his Defence Secretary praised the decision as a “useful first step”.

Since coming to Power, Trump has demanded that NATO members contribute significantly more to its budget.

The money for the increased defence spending will come from a cut in overseas aid, which has drawn incredulous responses from aid charities globally.

Starmer’s Labour government had previously committed to increasing defence spending to 2.5% but had not set a timeline. He added he hopes to hike spending to 3% of GDP in the next parliament, which would fall in the five years after elections expected in 2029.

He told MPs that the initial rise of 0.2% would cost the government £13.4 billion more every year from 2027.

That will mean some “extremely difficult and painful choices,” he told Parliament, but added it would contribute to the “biggest sustained increase in defence spending since the end of the Cold War.”

The government would “set a clear ambition for defence spending to rise to 3% of GDP in the next parliament,” he added.

Trump has demanded that NATO allies more than double their defence spending targets to 5% of economic output.

As he made the announcement, his Chancellor, sitting in the seat next to him looking stony-faced as part of her “nest egg” for future investment in “UK PLC,” was removed. There had been speculation that Rachel Reeves had earmarked the funds raised by cutting the overseas aid budget for infrastructure projects domestically.

She is now more certain to either raise taxes or cut public spending in next month’s spending review.

The President of the National Farmers’ Union has blasted Chancellor Rachel Reeves for “lacking respect” for Britain’s farmers, following Labour’s inheritance tax raid.

Speaking to reporters outside the Union’s conference in London, President Tom Bradshaw noted that although the union has engaged in a “frosty” meeting with Environment Secretary Steve Reed, Reeves is yet to sit down with them to discuss the policy.

The pound again tested the top of its recent range yesterday and although it ran into selling, it was less aggressive than it has been in recent sessions. Sterling reached a high of 1.2677 and closed at 1.2670.

Consumer confidence fell as predicted in January as household budgets were squeezed by President Trump’s threats to impose tariffs on imports from some of America’s trading partners.

The wholesale redundancies announced for Federal Government employees by Elon Musk’s Department for Government Efficiency have also darkened the mood of the “man in the street.”

U.S. Treasury Secretary Scott Bessent on Tuesday argued the U.S. economy is more fragile under the surface than economic metrics suggest, and vowed to “re-privatize” growth by cutting government spending and regulation. This is a reference to the Trump Administration’s cure-all policy to reduce the footprint of the Federal Government.

In his first major economic policy address since taking office, Bessent said that interest rate volatility, sticky inflation, and reliance on the public sector for job growth have hobbled the U.S. economy despite positive top-line GDP growth and low unemployment.

While the public sector has supported the strong jobs data in the recent past, it is hard to agree that interest rates have been volatile. The Federal Reserve has so far managed the rise in inflation well while as it loosens monetary policy as inflation falls, it has acted responsibly in the market’s eyes.

The latest data released by the Bureau of Labor Statistics shows that in January, the annual inflation rate rose to 3%. The Federal Reserve’s target, set when inflation was more than 9% in June 2022, was 2%. It has not reached that target, and never will during the current cycle, despite the Fed cutting interest rates three times in the Fall of last year.

Trump supporters have adopted the sycophantic view that the Fed reacted to rising inflation by hiking rates, but they were not the cause of higher prices, some of which were the “fault” of the previous administration’s support for the country during and just after the pandemic.

Bessent agreed with that view commenting that “The previous administration’s over-reliance on excessive government spending and overbearing regulation left us with an economy that may have exhibited some reasonable metrics but ultimately was brittle underneath, and heading for an unstable equilibrium.”

U.S. GDP output at a 2.8% rate in 2024, marginally slower than the 2.9% in 2023 and defying two years of Federal Reserve rate hikes for an economy that Fed Chair Jerome Powell recently described as “strong overall.”

While job growth slowed in January, a low 4.0% unemployment rate is likely to extend the Fed’s pause on rate hikes for now.

The fall in consumer confidence may well lead to the Federal Reserve resuming rate cuts as early as June, according to market observers. The dollar is supported by the market’s expectation that rates will remain on hold for a considerable time.

Yesterday, the Greenback fell to the bottom of its recent range, racing a mow of 106.19 and closing at 106.28.

Germany’s gross domestic product shrunk by 0.2% year-on-year in the last three months of 2024, with manufacturing in particular, in decline.

Friedrich Merz, the new German Chancellor, should feel some sympathy for Federal Reserve Chair, Jerome Powell since both now have jobs which no one wants while they have been shoehorned into positions of power.

As Merz and the conservative CDU/CSU bloc look for partners with whom they can form a government, the SPD is one obvious choice.

Following one of the worst results ever for a Party set to form a government, the CDU/CSU must form a coalition with the Social Democrats of the SPD. The ultra-right AfD overtook the SPD and became the second party, taking home a fifth of the popular vote. The Left saw a surge, the Greens fared poorly, and the Liberals did very badly. The red-brown coalition just missed entering the Bundestag.

Germany’s gross domestic product shrunk by 0.2% year-on-year in the last three months of 2024, with manufacturing in particular, in decline.

Annual inflation in the eurozone and European Union is drifting away from a 2% goal established by the ECB in 2024. According to a report released Monday by Eurostat, the annual inflation rate climbed to 2.5% in the eurozone in January and 2.8% in the broader European Union.

The inflation rate has been climbing since it dipped to three-year lows in September 2024. At the time, ECB President Christine Lagarde predicted the rates would climb again for several months before reaching the bank’s 2% medium-term target in the Autumn.

The highest rates were recorded in Hungary (5.7%), Romania (5.3%), and Croatia (5%), while the lowest rates were recorded in Denmark, 1.4%, Ireland, Italy, and Finland, all of which saw 1.7% annual inflation.

In a speech yesterday, Isabel Schnabel, a member of the ECB’s Board and its Governing Council, surprised markets by saying that she believes that interest rates in the region are no longer either restricting or suppressing growth.

Schnabel said that the Eurozone’s economic weakness was not due to overly high borrowing costs but to structural factors, citing an ECB survey of banks and a modest rebound in lending.

“It is becoming increasingly unlikely that current financing conditions are materially holding back consumption and investment,” Schnabel said in London. “The fact that growth remains subdued cannot and should not be taken as evidence that policy is restrictive.”

The ECB has reduced interest rates five times since last June and, while a cut next week is likely, policymakers are discussing how much further rates must fall when inflation is still a bit too high, and the economy is struggling.

The ECB said wages set through negotiations between employers and unions or similar bodies were 4.12% higher in the fourth quarter of 2024. This was welcome news for the Central Bank as it grapples with inflation-busting wage settlements, particularly in the service sector.

The Euro rallied to the top of its recent range yesterday but again ran into significant selling pressure. It reached a high of 105.19, but bulls will have been encouraged that it managed to close above 1.05, at 1.0516.

Have a great day!