28 February 2023: Labour low-key about UK economy

Rishi Sunak met with EU Commission President Ursula von der Leyen yesterday to finalize the agreement on how trade between the UK and Northern Ireland would be treated.

Finally, this was the final piece in the Brexit jigsaw that was in danger of dragging on indefinitely. The Northern Ireland protocol, which had governed the movement of goods across the Irish Sea, has now been replaced with the permanent Windsor Framework.

The main change will be in the customs treatment of goods either bound for Northern Ireland or bound for the Republic of Ireland. A new green lane will be created which will allow goods remaining in the North to flow through without any customs checks while goods in transit to the South will face less stringent checks than are seen now.

While the Framework is unlikely to be acceptable to everyone, Labour have already confirmed that they will vote in favour in Parliament, so even if there is a wholesale rebellion by backbench conservative MPs the bill will pass through the House of Commons with little difficulty.

The other interested group who may dissent are the Unionist Party, the DUP in Belfast. There has been a sweetener included in the deal named the Stormont Brake, that will allow the Northern Ireland Assembly to veto, under certain conditions, any laws put in place by the EU that they disagree with.

The big sell for Sunak will be to get the Unionist’s on side, but in his own words the agreement brings Belfast back within the protection of the rest of the UK and guarantees its continued sovereignty.

Ironically, while the Framework has been favourably received by the business community, there is a faction which was happy with the way things were, since they had access to both the UK and the single market on more generous terms than those of their competitors on the mainland.

Furthermore, companies reading with mainland UK will need their suppliers to complete some additional paperwork that is less onerous than is needed now, but still is likely to add to the cost of doing business in Northern Ireland.

Sir Keir Starmer hosted leaders from the commercial and financial sectors to flesh out the mission for a future Labour Government. While he added some more detail to his plan, the major change from what has gone before was a commitment that his Chancellor would forge partnerships with the entire business community to achieve Starmer’s pledge for the UK to become the fastest growing economy in the G7. By way of comparison he commented that the UK would, within the next ten years, become a smaller economy per capita than that of Poland.

The pound was buoyed by the Brexit agreement finally being reached. It reached a high of 1.2056 versus the dollar and 1.1377 against the euro, eventually closing at 1.2057 and 1.1366.

Senior business leaders from commerce and finance are still not convinced that the Fed is able to engineer a soft landing for the U.S. economy, and that the danger of a recession remains even after the FOMC reduced the size of its most recent hike from fifty basis points to twenty-five.

While the majority decision of the FOMC was to taper the size of the hike, the minutes indicated that there was a substantial number of votes for a continuation of fifty point increases.

The January employment report which was published after the meeting had taken place was incredibly strong and if that had been known in advance it may have swayed the majority to vote for fifty points.

The next release of job data will be on March 11th, which will still allow the FOMC plenty of time to digest it before a decision is made on the next hike at the meeting, which will be held on the 22nd.

Having added in excess of 500k new jobs in January, the expectation is that provided there is no significant revision to that data and the February report continues the trend of gains in excess of 200k new jobs, members voting for fifty points will return to the majority.

There has been no comment from Jerome Powell since the minutes were published last week, so the market considers him to still be hawkish over bringing inflation down.

The market is now also looking at output data in a more serious manner, since the hikes that have been going on since last spring have reached the point where they are affecting demand.

Pending home sales were significantly higher in January than any time in 2022. They rose by 8.1% following a downwardly revised figure of 1.1% in December.

The patchy nature of the economy was also seen in durable goods orders fell by 4.5% following a rise of 5.1% in December. The Dallas Fed Manufacturing Index also fell to -13.5 after a reading of -8.1 in December.

The dollar index gave back all of its gains from Friday, falling to a low of 104.54 and closing at 104.64.

Now that Brexit is finally complete, the EU commission can begin its long-awaited and necessary revamp of its own regulations, which are both unwieldy and cumbersome.

Brussels needs to do far more to promote intra-union trade, which should be a far more significant driver of growth than it is currently.

The European Union has a habit of making hay while the sun shines, ignoring issues that quickly become significant issues during a real or potential crisis.

There have been several examples over the recent past, including the handling of vaccines during the Pandemic, the over reliance on Russian energy supplies last spring and summer, while the financial system which allows banks an overly generous timeframe to provide for bad loans is in need of a total overhaul.

Ursula von der Leyen, the President of the Commission, can take some credit for finally getting Brexit over the line, but her performance up until yesterday has been criticized in several member nations.

She has appeared at times to be overly heavy-handed, while in dealing with other issues appearing to be too easily swayed by vested interests.

There has been a general feeling of growing confidence over the past month, as the global economy has been seen as unlikely to fall into a recession. Within the borders of the EU, the outlook remains patchy.

Christine Lagarde appears to have managed to quell any serious dissent over further rate increases, she is likely to shoulder a degree of blame if some economies, Italy in particular. fall into recession.

Central Banking 101 dictates that raising interest rates at a time of an economic slowdown will quickly lead to a long and damaging recession. Should Italy fall into recession, it will be entitled to receive support from the rest of the union for supporting continued rate hikes.

The turnaround in G7 economies that has generally taken place since the turn of the year hasn’t yet fed through into the grassroots of EU nations, and this is most likely due to continued high inflation. Confidence indexes continue to lag other indicators, leading to a general malaise which is proving difficult to shift.

The euro bucked its recent trend and rallied to a high of 1.0620 yesterday, eventually closing at 1.0608.

Have a great day!