27 January 2025: Growth has edged up in January

Building a third runway at Heathrow Airport has been a contentious issue for successive Governments. Still, yesterday, Rachel Reeves found herself backed into a corner and was left with little choice but to confirm that she will announce her backing for the project this Wednesday.

Reeves’ stated aim to grow the economy has led the government to support several projects facing opposition from environmental groups. The Mayor of London, Sadiq Khan, has voiced his opposition several times, commenting that the effect of building a third runway on air quality could be disastrous.

Khan is not the only official who is disappointed by Reeves’ plans. Energy Secretary Ed Miliband appears to be on a collision course with the Chancellor over his “net-zero” plans, which run contrary to the Chancellor’s rush for growth.

During her interview with the BBC’s Laura Kuenssberg yesterday, Reeves was also asked if she had underestimated the number of wealthy people who would abandon the country because of doing away with the non-dom status which had previously meant that they did not need to declare overseas earnings for UK taxation.

The Government is considering something of a short-term fix to appease those who were considering leaving the country.

The UK economy has been 4 percent smaller since Brexit, while exports and imports are forecast to be 15 percent lower overall. Keir Starmer is under growing pressure to forge closer economic links with Europe five years on from Brexit, as a major new poll shows voters favour prioritizing more trade with the EU over the US.

Even in Nigel Farage’s seat of Clacton, more people think the UK is better off trading more with its neighbours on the continent than with the US under the Reform UK leader’s ally Donald Trump.

In one of the clearest statements by a senior government minister on Brexit, Reeves answered yes when asked if she was clear that leaving the EU had damaged the UK’s financial position.

Reeves continued to use the “mess” she inherited as a crutch to support her actions, stubbornly refusing to accept that she had misled the public over tax increases and the sum that would be recouped by changes to inheritance tax for farmers.

Traders see an 84% probability that the Bank of England will lower interest rates by 25 bps at its policy meeting on February 6, amid expectations of divergent monetary policy outlooks between the Fed and the BoE.

There is still a possibility that the cut could be 50 bps, but the chances of that are rated at less than 30%.

The pound recovered well as the market took the opportunity to “sell the rumour and buy the fact” relating to President Trump’s pre-inauguration rhetoric.

It rallied to a high of 1.2502 having fallen to a low of 1.2160 eventually cloning marginally lower on the week at 1.2485.

The market has come to terms with the fact that the economy is still robust even as several Wall Street titans, including J.P. Morgan CEO, Jamie Dimon, voiced their concerns about its long-term viability.

As inflation stays “sticky” and the December employment report surprised to the upside, this week’s meeting of the FOMC is considered certain to leave the Fed Funds rate unchanged at 4.5%.

Growth and output in the US economy remained at a comfortable level in the final stretch of 2024, powered by healthy consumer spending, creating even more separation from its global counterparts.

Economists surveyed by Bloomberg project the government’s initial estimate of fourth-quarter gross domestic product to show an annualized 2.7% increase. That would follow back-to-back quarters of about 3% growth.

This Thursday’s report on US economic activity will be published a day after the conclusion of the first Federal Reserve policy meeting of 2025. At their December meeting, policymakers signalled just two interest-rate cuts this year, possibly leaving rates unchanged for the whole of the first quarter and well into the second.

The report on durable goods orders for December will be published this week, with the market changing its prediction to a range rather than an absolute number due to the data’s unpredictability.

The data is expected to show growth of between 0.8% and 1.2% in items such as ships and aircraft in December.

Consumer confidence data is also expected to be published this week, with the overall number expected to receive a “bump” from expectations of the “Trump effect.”

Finally, this week, the Fed’s preferred measure of inflation will be published. Personal Consumption Expenditures are predicted to have remained unchanged in December at 2.4%.

One of the downsides for the economy is that loan delinquency rates have been rising, especially for lower-income households. Wealthier households that account for about 40% of consumer spending have benefited from the equity-market rally and asset appreciation.

The Fed’s first meeting since Trump took over the White House is expected to disappoint the President. While bemoaning the fact that inflation is still “too high”, Trump has also expressed his concern that rates have not fallen more quickly.

The dollar index saw some significant selling last week as the market took its time to review Trump’s first couple of weeks in power.

It fell to a low of 107.22 and closed at 107.46.

With the Fed expected to leave rates unchanged and other G7 nations, except Japan” likely to cut rates, the dollar is unlikely to fall much further.

Business activity showed some welcome growth this month, even though it is difficult to spot amongst the doom and gloom that currently shrouds the Eurozone.

The HCOB Flash Eurozone purchasing managers’ index (PMI) published by S&P Global registered a figure of 50.2 for the single-currency area, after 49.6 in December. Any reading above 50 indicates growth, while a figure below 50 shows contraction.

“The kick-off to the new year is mildly encouraging,” said Chief Economist at Hamburg Commercial Bank, Cyrus de la Rubia.

“The private sector is back in cautious growth mode after two months of shrinking. Germany played a role in improving the eurozone economy,” de la Rubia said, noting that business activity in the area’s largest economy stabilized at the start of the year after six months of decline.

In contrast, France’s economy remained in contraction. Overall, the improved eurozone dynamic was linked to timid improvements in manufacturing.

The Managing Director of the IMF, Christina Georgieva appeared at a panel with her predecessor, Christine Lagarde, in Davos on Friday, and spoke of how the economic pronouncements from the ECB differ from those of the Fed and the new U.S. Administration.

The Fed has no issue with “bigging up” its achievements and when it has successes, for example in bringing inflation down it “shouts from the rooftops” In contrast when the ECB has a success it says, “inflation is falling in line with expectations, but we must act with caution”.

The time for caution is running out, Georgieva believes, and the time is approaching for bold action.

Last week, data for construction output was released, and it showed a significant improvement over December’s figures.

Despite the S&P data, Germany is still lagging in many categories. Last week’s IFO survey saw economic sentiment fall from 15.7 to 10.3, while the same data for the Eurozone rose from 17 to 18.

It is almost certain that the ECB will lower rates at its latest meeting, which takes place this week. This will contrast with the expected pause by the FOMC.

Also, due for release this week is a slew of economic sentiment for the Eurozone. This is expected to also show that confidence has bottomed out, while the likely rate cut may also provide an increase in sentiment going forward.

The euro made significant gains last week, but there is still little cause for traders or investors to speculate that it will rally further.

It climbed to a high of 1.0521 on Friday and closed at 1.0494.

Have a great day!