28 January 2025: Reeves encouraged to concentrate on “Ma & Pa” firms

The Chancellor has told anyone who will listen that the Government’s number one priority is economic growth, and she is willing to fight tooth and nail to ensure that it happens even as she hobbles herself by also trying to mend the country’s finances which, she believes, were in a particularly parlous state when she took over.

As Kemi Badenoch said in a recent interview, Ms Reeves is in danger of falling into the trap of confusing pledges to act with actual achievements.

She will seemingly upset another powerful lobbying group tomorrow by supporting building a third runway at Heathrow Airport.

Reeves believes that ensuring that planes can land rather than circling the airport, and waiting in line for a landing berth, will “kick some life into the country’s lacklustre economy.”

However, opponents claim expanding the airport would lead to higher emissions and blight local communities with extra noise and pollution. Last week, Friends of the Earth said it would be “hugely irresponsible amid a climate emergency”.

Reeves is gambling both her and the country’s fate on getting her policies right all in one go. She lauds the achievements of her colleague, Angela Rayner, in passing changes to the planning laws to enable housing and infrastructure projects to begin, only to find that the country does not possess the skilled workers to make the plans a reality.

There is little doubt that when she provides Parliament with spending plans for fiscal 2025 something is going to have to give. Unless there is a significant turnaround in productivity and output, growth is expected to be anaemic at best for the rest of the year which will mean that, given the interest burden the country is saddled with due to the level of borrowing Reeves has authorized over the past few months and the rise in long-term borrowing costs she is going to have to either cut spending, which means shelving some of her plans, or raise taxes.

Such a choice will make her very unpopular with either her colleagues in the House of Commons or voters.

The Governor of the Bank of England has decided that less is more when he considers the amount of advance guidance he provides to the market.

He is scheduled to make a speech tomorrow. It is expected that he will try to inject a sense of balance into monetary policy decisions by voicing his concerns about both the level of inflation and economic growth.

He is unlikely to try to second guess his colleagues on the MPC, although a twenty-five-bps cut is highly likely to be the outcome of next week’s meeting.

Sterling continued to attract buyers yesterday despite the risk-off attitude in the market caused by China’s release of an AI bot to rival ChatGPT. It reached a high of 1.2523, its highest in three weeks, and eventually closed at 1.2490.

Donald Trump is living in an “economic dreamland”, where inflation continues to fall even as the Central Bank loosens monetary policy to provide support to the economy.

Trump has set himself on a collision course with Fed Chairman, Jerome Powell, as the FOMC prepared to begin its two-day meeting, which will likely end with the Fed Funds staying unchanged.

The President has suddenly embarked on a journey to coerce US Federal Reserve officials to lower interest rates, something he has sincerely put his mind and body into as soon as he became the new US President. Trump has now openly challenged Jerome Powell and the independence of the US Federal Reserve by this means, through his statements made via a video call at the World Economic Forum in Switzerland.

Trump’s primary argument is that the US Federal Reserve should begin considering lowering interest rates as the oil prices will be going down. Trump even took to declaring a national energy emergency and has given orders to drill as much oil and gas as possible, to fulfil America’s energy requirement in recent times.

Even as the economy continues to perform well, this week’s release of Q4 GDP data will likely show that the economy grew by 2.8% in the period between October and December, making it the highest in the G7. Trump, rather like Oliver Twist, wants more.

Powell and his colleagues will be more concerned about the level of Personal Consumption Expenditures, the numbers for which will be published on Friday. It is expected that this measure of inflation will rise again, even if only marginally from 2.4% to 2.6% year-on-year.

Wall Street was in turmoil yesterday, with US tech giants bracing for significant losses as the stock market plummeted in the morning, following the unexpected emergence of a Chinese rival in the AI chatbot.

Before the markets opened, futures trading indicated major falls for technology and artificial intelligence stocks ahead of the American stock market’s opening earlier today, with investors dumping around one trillion dollars of technology stocks in premarket trading sending the S&P 500 2.3% lower before the bell.

Leading AI-related companies including Nvidia, Microsoft and Meta had already shown declines ahead of Monday’s market opening. The market turbulence comes as Chinese AI chatbot DeepSeek has rocketed to the top of Apple’s App Store charts across the UK, US and China.

It appears that China has got its retaliation first against the threat of 25% tariffs being imposed on its exports of finished goods and parts to the U.S.

The risk-off attitude driven by the Chinese action failed to provide support for the dollar, which lost ground yesterday.

The index fell to a low of 106.97. Even as it closed at 107.33, the Greenback has now fallen back to its mid-December level at which it began its rally in advance of Trump’s inauguration.

The ECB will cut its prime interest rate on Thursday. Of that, there can be no doubt. The only decision that remains to be made is whether the Governing Council feels that it has the leeway to agree to a fifty-point cut.

The Central Bank’s two most effective speakers, Isabel Schnabel and Philip Lane, have spoken recently about balancing rate cuts with inflation falling to its 2% target.

Both have said that they expect price rises to reach their 2% target this year, relieving some of the pressure to leave interest rates at their current level for longer.

The markets believe that the ECB will perform a cut at every meeting from this Thursday until July. It expects every cut to be of twenty-five basis points, but beginning this next round with fifty basis points would give the market a sure sign that it is serious about promoting growth.

Preliminary GDP data for the fourth quarter is due for release later this week, with economists predicting that the economy grew by 1% between October and December, up from 0.9% in the third quarter.

It is also expected that pan-Eurozone business and consumer confidence will have either remained the same or risen slightly. This will further prove that the economy may have “bottomed out.”

In an interview with an Austrian newspaper yesterday, ECB Chief Economist, Philip Lane told a reporter that the ECB can ease policy further this year but must find a middle ground that neither induces a recession nor causes an undue delay in curbing inflation.

“If interest rates fall too quickly, it will be difficult to bring services inflation under control,” Der Standard quoted Lane as saying on Monday.

“But we also don’t want rates to remain too high for too long, because that would weaken the inflation momentum in such a way that the disinflation process would not stop at 2%, but inflation could materially fall below target,” Lane added.

A key condition in getting price growth under control would be to see a drop in services inflation, which has been stuck at around 4% for most of 2024, Lane said.

But wage growth, one of the biggest factors in price pressures, will be “significantly” lower this year, ensuring a further decline in inflation, which stood at 2.4% in December.

While economic growth has been fairly insipid for most of the past year, Lane said he did not see the kind of recessionary risk that would call for a dramatic acceleration in monetary easing.

A recession was also not necessary to get inflation under control, given that the conditions for taming price growth were mostly there already.

“What we will have to work out this year is the middle path of being neither too aggressive nor too cautious in our actions,” Lane added.

The euro continued to defy gravity yesterday, rising to a high of 1.0533 but fell back to close marginally lower on the day at 1.0488.

Have a great day!