28 August 2024: Starmer continues the “Blame Game”

The Prime Minister held a press conference in the rose garden of 10 Downing Street to inform journalists that the country can expect a tough time when Rachel Reeves presents her first budget to the House of Commons in a little over a month.

True to form, Sir Keir Starmer attached blame for the twenty-two billion black hole in the country’s finances to the previous Government, a charge that has been constantly denied by the Conservatives, who say that Labour would always raise taxes if they won the election.

The Office for Budget Responsibility, which has all the facts and figures relating to income and expenditure, has remained quiet on this issue. That may tell part of the story.

Starmer warned that those with the largest shoulders would be asked to carry the heaviest burden, while he said everyone would be affected.

Once again, he apologized for having had to do away with the pensioner’s winter fuel allowance but told his audience that his hands had been tied by the profligacy of the previous administration and the necessity to” balance the books”.

Having said constantly during the election campaign that income tax, VAT and National Insurance would be unchanged under a Labour Government, it seems that Reeves will concentrate on Inheritance and capital gains tax increases in her budget.

The fact that the economy has grown at twice the rate in the first six months that it was expected to grow in the whole of this year seems to carry little weight for the Cabinet.

There has been no estimate for the level of additional tax revenue that will be produced this year, which should see an increase in inflows into the Treasury.

The wage settlements that have been reached with train drivers, junior doctors and other public sector workers have added nine billion pounds to the “black hole”, but Starmer says that the alternative, which was to see the country continually crippled by industrial action, could not be allowed to continue.

The pound continued its recent rally yesterday, reaching a high of 1.3266 versus the dollar and 1.1862 against the Euro. It closed at 1.3261 and 1.1857.

The reason for the pound’s continued strength is the market’s belief that the Federal Reserve will cut rates consistently over the fourth quarter, while the Bank of England may continue to be a little more hawkish over inflation.

The U.S. economy has reacted to the continuation of the Fed’s hawkish monetary policy, due to which interest rates have remained at two-decade highs for more than a year, in “copybook” style.

While employment growth has moderated, inflation has also fallen and is now close to the Central Bank’s 2% target.

Jerome Powell, the Fed Chairman, is now confident that interest rate cuts can begin, with the first happening next month, as the economy looks like achieving the fabled “soft landing” where price increases are still controlled, while job creation is still positive.

It is nonsense to suggest that Powell has turned into an “inflation dove” following his speech at the Jackson Hole Symposium last week, he was merely injecting a measure of realism into the monetary policy conversation.

Many of the colleagues on the FOMC wanted rates to be cut at the last FOMC meeting, but Powell managed to persuade them to wait for one more month. It must be remembered that the last FOMC meeting was held before the publication of the July employment report, which showed that job creation had slowed, and the June figure was revised down by almost 10%.

Also, the rate of wage growth continued to slow from a downwardly revised figure of 3.8% to 3.6%, which is also a sign that inflation will continue to abate.

Powell is renowned for “ploughing his furrow” and has still been steadfast on the need for inflation to be brought back close to the Fed’s target. Now that has been achieved, he feels sufficiently confident to loosen monetary policy.

One dissenting voice that was heard at Jackson Hole was that of Raphael Bostic, the President of the Atlanta Federal Reserve, who commented that “although a rate cut “on the table”, it is not a “done deal”, despite the market’s impression otherwise.

One interesting survey that has come to light recently is the “sausage index”. It is a gauge of the consumer’s purchasing habits which shows that in good economic times, butchers sell less “sausage” and more prime cuts, and as the economy slows consumers “tighten their belts” and buy more sausage meat.

The index is currently showing that although the purchases of sausage meat have increased over the current quarter, prime cut purchases are only marginally down.

The market has now accepted that there will be a rate cut next month and is beginning to consider relative rates of growth.

This has seen the dollar’s fall slow and, possibly, end.

Yesterday, the dollar index fell. But did not make a new low, it reached 100.52 and closed at 100.56.

It is kind to say that the German Economy has “lost its sheen” in recent months.

The fact is that Germany, once a shining light of industrial efficiency and dynamism, is still the “sick man of Europe”.

The Eurozone’s largest economy contracted by 0.1% in the second quarter of this year, and data published so far for the current three-month period shows that it may well have slipped back into recession.

Germany has been “beaten at its own game” by China and has been slow to react to changing global conditions.

China can now produce heavy industrial products that are cheaper and of a similar quality to those produced in Germany.

The final nail in “Germany’s coffin” was last year’s increases in both the cost and scarcity of energy, both gas and oil” which its economy has not fully recovered from.

The country has been “skewered” by its outmoded and outdated fears of rampant inflation, even though it is clear where the raised level of inflation that has been seen over the past eighteen months emanated.

Even now, German members of the ECB’s Executive Committee and Governing Council are still “lukewarm” over the need for rates to be cut again.

Isabel Schnabel has continually made hawkish noises about her concerns over wage growth and how inflation may surge again if the ECB embarks on a programme of rate cuts.

It is by no means certain that there will be a further rate cut at the September meeting.

Klaas Knot, the Governor of the Dutch Central Bank, said yesterday that the ECB can gradually lower interest rates if inflation continues to fall, but more data is needed before a September cut can be decided.

These are a repeat of the sentiments of the Austrian Central Bank Head, Robert Holzmann who said much the same thing in an interview at the weekend.

The Euro is still gaining support from the possibility of a divergence in monetary policy between the Eurozone and the U.S.

Philip Lane spoke at Jackson Hole, of the double-edged sword that faces the ECB. On the one hand, cutting too often or too quickly may mean that inflation never reaches the ECB’s 2% target, while an overly hawkish attitude may see the entire economy slip into recession.

The euro made a lower high yesterday as some residual buying took place, but not as aggressively as has been seen over the past week. It reached a high of 1.1190 and closed at 1.1184.

Have a great day!