28 November 2024: Dhingra sees uncertainty in the economic outlook

Rachel Reeves appears to have been backed into a corner this week as she faced the wrath of the CBI at their annual conference in London.

Having relied on the flimsiest of semantics to justify her raising national insurance rates and thresholds for employers, it seems that she was left with little chance but to tell the bosses’ union that this was her only opportunity to set the country’s finances on a credible path and that she would not be returning like Oliver Twist to ask for more.

She has started on a dangerous path since her pledge demands that growth increases significantly over the next two or three years to allow the Treasury to see sufficient inflows in taxation to allow significant expenditure on public services and the NHS to happen.

Although pensioners and farmers will still have plenty to say, Reeves will hope to draw a line under her first 100 days as Chancellor, which has not gone exactly as she had hoped.

Opposition MPs are still reminding her of the apparent “errors” in her CV, in which she claims to have significantly more experience as an economist than is the case. It would be ironic if such a “schoolgirl error” made her job untenable.

Goldman Sachs Research expects continued growth from the UK economy in 2025, although its expansion may be slower than some economists predict. Economists forecast the UK’s GDP to increase by 1.2% in 2025, which is slower than the Bank of England’s projection of 1.5% and just below the consensus estimate of economists surveyed by Bloomberg of 1.3%. Goldman forecasts 0.4% growth in the first three months of 2025 compared to the last three months of 2024, slowing to around 0.25-0.30% quarter on quarter in the rest of next year.

Several key factors will impact the economy, including uncertainty around trading arrangements with the US, a less expansionary budget, and proposed changes to the housing and development planning system.

Bank of England Monetary Policy Committee external member Swati Dhingra has highlighted the uncertainty surrounding the UK’s economic outlook, noting that future inflation trends are difficult to predict due to various unpredictable factors.

Speaking at the Bank of England Watchers’ Conference organized by King’s Business School, she noted that “risks to the outlook are uncertain and difficult to gauge.” She also pointed out that a “lack of reliable data is hindering” effective monitoring of inflation, making it harder to make informed decisions.

However, Dhingra added that the UK no longer stands out as an inflation “outlier” among advanced economies, suggesting that the country’s inflation situation is improving.

The pound posted sharp gains on Wednesday. In the North American session, it made a high of 1.2683, closing at 1.2665. The reaction was due to the release of data in the U.S. which indicated that growth may slow in the New Year, pressuring the FOMC to cut rates.

The reaction to the publication of Q3 GDP data and the latest Personal Consumption Expenditure numbers was a little curious since they showed that if the U.S. economy is going to enter a recession in 2025, it is still some way off.

The market already believes that there is a low possibility of the FOMC voting to cut rates at its meeting next month, so the fact that the economy grew by 2.8% between July and September should have been of little negative consequence.

It may be that the positivity that the Greenback has gleaned from Donald Trump’s stunning election victory is beginning to wear off, and his threat to introduce tariffs on goods imported from America’s major trading partners will both hamper growth and see inflation rise.

The US economy expanded at a healthy annual pace from July through September on strong consumer spending and a surge in exports, the government said Wednesday, leaving unchanged its initial estimate of third-quarter growth.

The Commerce Department reported that growth in U.S. gross domestic product showed that the American economy is proving surprisingly durable. Growth has topped 2% for eight of the last nine quarters.

Consumer spending, which accounts for about 70% of U.S. economic activity, accelerated to a 3.5% annual pace last quarter, up from 2.8% in the April-June period, signalling the fastest growth since the first quarter of 2023.

A new president will enter the White House in 2025, but some debates are still the same. Wall Street analysts are split over the Federal Reserve’s next moves on interest rates, dissecting recent remarks from policymakers as 2024 nears its end.

With just one FOMC meeting left this year, Jerome Powell and his colleagues are wrapping up a period marked by the first rate cut in the current cycle. Optimists are hoping for a year-end rate cut in December, while the majority urge caution. Some observers project a steady path of cuts in 2025, potentially bringing rates to a neutral level of around 3.25%.

Although the Labour market looks resilient, few commentators would have expected job creation to remain positive throughout the year, with two NFPs to go there is a chance the headline number could turn negative.

On Tuesday, the Federal Reserve released the minutes from its Federal Open Market Committee (FOMC) meeting held on November 6–7, 2024. These minutes offer a detailed glimpse into the discussions that shaped their monetary policy decisions. While the headlines highlight a cautious stance, a few analysts raised serious concerns, suggesting that the Fed may be sugarcoating its challenges.

The FOMC minutes reveal that the Fed reduced its target range for the federal funds rate by 25 basis points to 4.5%–4.75%. Members largely agreed this adjustment was warranted as inflation continues to progress toward the 2 % target while economic growth remains solid.

However, the labour market emerged as a significant concern. While current labour conditions are stable, the Fed acknowledged the potential for rapid deterioration due to structural uncertainties, including immigration effects, natural disasters, and labour strikes.

The dollar dipped as traders prepared for today’s Thanksgiving holiday, which traditionally lasts two days. This week is effectively over.

Next week will be dominated by the release of the November Employment report.

The Dollar index fell to a low of 105.85 and closed at 106.06. It has now “given back close to 50% of its gains since the election, which denotes a healthy correction, but a lot will depend on the headline job creation data.

Not only are interest rates diverging between the U.S. and the Eurozone, but confidence, activity and GDP are also moving in the opposite direction.

ECB officials will have been envious of the growth rates that have been seen in the U.S. this year. While some economists see the U.S. slowing with a recession on the horizon, in the EU most are hoping one can be avoided.

Eurozone assets, including equities, credit and the euro, are expected to perform worse than their U.S. peers as the region’s economy deteriorates while the U.S. economy advances, analysts said.

Growth, particularly in Germany and France, the eurozone’s major economies, has been weak in recent months due to slowing demand for exports, hampered additionally by political uncertainty.

Adding President-elect Donald Trump’s proposals for hefty tariffs on imports into the mix will sting the eurozone even more, hurting exporters and potentially ending hopes of an economic recovery.

“If tariffs are levied as planned, European exports to the U.S. are likely to be hit hard, with the eurozone’s nascent recovery hitting a brick wall later next year and moving into 2026,” analysts at ABN Amro said in their 2025 outlook.

The European Central Bank should cut interest rates only gradually and not lower them to a level that stimulates growth, since that would not resolve the economy’s deep structural faults, ECB board member Isabel Schnabel told Bloomberg. The ECB is expected by investors to cut interest rates at every one of its upcoming meetings at least through next June and the 3.25% deposit rate is now expected to end 2025 at 1.75%, a level low enough – in the view of many economists – to start stimulating growth.

Schnabel went on to say that the Eurozone isn’t at imminent risk of recession, despite a softening labour market and signs of contraction in business activity.

In contrast to Schnabel’s remarks, the ECB Chief Economist, Philip Lane, believes that interest rates should not remain restrictive for “too long, Otherwise, the economy will not grow sufficiently and inflation will, I believe, fall below the target,” he said, adding that the ECB would not commit to its exact easing rhythm in advance.

French borrowing costs have surged past Greece with rising investor concerns, who are now favouring US assets instead. Political instability and rising debts have caused borrowing costs in France to rapidly soar. Five-year borrowing costs have reached 2.7%, surpassing Greece at 2.5%.

This is a drastic contrast to last year when Paris’s borrowing costs were significantly below Athens.

The euro gained ground yesterday as traders squared positions ahead of the long weekend in the U.S.

It climbed to a high of 1.0587 and closed at 1.0565, still well short of its first line of resistance at 1.0605.

Have a great day!