2 January 2025: The British pound is likely to experience a volatile year

It is six months this weekend since the Labour Party won a stunning election victory, gaining an eighty-plus seat majority and took power with the halls of Westminster echoing to the sound of the demise of the Conservative Party which appeared to be no longer relevant in British Politics.

In the six months that have followed, Sir Keir Starmer and his senior monsters have contrived through broken promises and unachievable targets, while letting down two significant sectors of the electorate.

It is almost unbelievable to report the result of a poll conducted last week, in which Labour had slipped below the Conservatives in the level of trust the country has in their ability to manage the economy.

On inflation, the Bank of England was premature in cutting interest rates twice when both core and headline inflation were showing signs of moderately increasing.

Andrew Bailey has stuck to his 2% target for inflation, even as his colleagues on the MPC voted for rates to be cut. This sent a slightly misleading message to the market, resulting in increased volatility in the lead-up to the Christmas holiday.

The economy has stagnated since the election, contracting in the third quarter, and flatlining in the fourth.

It is vital to Starmer’s plans that the economy grows so that the chancellor can keep her promise that the tax rises she delivered in her budget were a one-off, not to be repeated.

Several economists, in their predictions for 2025, are already saying that tax rises this year are highly likely if spending is to continue at its present level.

It seems odd to be saying this since its honeymoon period should still be in full flow, but the Government will not be looking forward to May 1st when all 21 County Councils and 10 unitary authorities are up for re-election.

A poll conducted for the Times newspaper showed that 57 per cent of the 51 economists polled predicted that UK interest rates would fall at least four times this year from 4.75 per cent. A quarter (22 per cent) thought the Bank of England would go further this year, bringing rates down five or six times.

The pound will begin the first full trading day of 2024 close to the bottom of its recent range, although it should be supported by comments from Bailey about future rate cuts.

It ended the year at 1.2519 versus the dollar and 1.2092 versus the Euro.

It is doubtful that yesterday’s terrorist attack in New Orleans will change President-elect Trump’s policies towards immigration, although it may well harden his reserve.

Trump is on record as saying that while there is an issue created by economic migration, several of the groups crossing the country’s southern border are intent. On harming U.S. citizens.

Elon Musk, the world’s richest man, and confident of the incoming President, issued a stark warning about the state of the U.S. economy yesterday.

Speaking on TV yesterday, Musk expressed serious concerns about the U.S. national debt, which has reached a staggering $36.17 trillion. According to Musk, if drastic measures aren’t taken soon, the dollar’s value could plummet to “nothing,” leaving the country in financial ruin.

Interest payments on the debt are consuming an alarming 23% of all government revenue — a steadily rising figure. “If we don’t act, the entire government budget will be used just to pay interest,” he explained. This would leave no funds for critical programs like Social Security or Medicare. Musk’s grim assessment shows a potential economic meltdown if reforms aren’t enacted quickly.

The numbers back up Musk’s concerns. In fiscal year 2024, the federal government spent $1.1265 trillion on interest payments alone, compared to $4.92 trillion in total revenue. With interest costs eating away at the budget, Musk’s warning is a wake-up call for policymakers and citizens alike.

Will America act in time to prevent this financial catastrophe?

It is to be hoped that the President-elect will take heed of Musk’s words and take action to cut the country’s borrowing, even if it means that the poorest in society suffer. Trump has argued that raising taxes would harm the economy, reduce job growth, and negatively impact middle-class families. He often frames tax increases as detrimental to American businesses and workers.

He frequently touts the Tax Cuts and Jobs Act of 2017, which he signed into law, as a significant achievement of his presidency. This legislation lowered the corporate tax rate and provided tax cuts for individuals, which he claims spurred economic growth.

The Administration is unlikely to see monetary policy as a means of spurring on the economy since Jerome Powell made it clear following the most recent FOMC meeting that rates may stay on hold for some time.

The minutes of the meeting are due for publication on January 8th, while several members of the committee will make speeches before that.

The December employment report is delayed until January 10th. While job creation has been better than expected, the market is still expecting a dip, which has not so far materialized.

The dollar index ended 2024 with a show of strength. It closed at 108.48, which was close to its highest level for the entire year.

While the Southern European Member States of the Eurozone may be cautiously welcoming in 2025, the more industrialized states to the north and east are facing the new year with trepidation.

The new French economy minister is “hoping” that he can restrict the country’s budget deficit to around 5.5% of GDP to protect growth.

Eric Lombard, previously Head of Caisse des Depots, the investment arm of the French government, will be tasked with steering through parliament a budget after the previous government lost a no-confidence vote in early December amid a backlash against its belt-tightening proposals.

Lombard’s deficit objective for next year is higher than the 5% targeted by the last government. But it would still represent a drop from this year when the deficit is expected to widen to above 6% of gross domestic product.

“We need to amend this (budget) bill to establish a good budget. With a deficit slightly above 5% to protect growth,” Lombard told a French newspaper last weekend.

“To protect growth, the reduction of the deficit must come more through reductions in public spending than through taxation,” he said, adding that any tax increases should be “very limited”.

French President Emmanuel Macron on Tuesday said he recognized that his decision to call early parliamentary elections in June had created more political instability in the country, in a rare moment of contrition.

The speech caps a tumultuous 2024 for Macron, who shocked the nation halfway through the year by calling early elections, a gamble that backfired when voters delivered a hung parliament with a significant increase in far-right lawmakers, diluting Macron’s power.

“Lucidity and humility force (me) to recognize that at this stage, this decision has produced more instability than peace, and I fully own up to that,” Macron said in a televised address ahead of New Year celebrations.

In Germany, an economist has warned that the country should copy Britain to avoid a loss of prosperity. The suggestion comes after Germany faced industrial decline and the threat of Donald Trump’s tariffs.

Carsten Brzeski, an economist at Dutch Bank ING, and a German native, said Europe’s manufacturing engine needed to reinvent its economic model and look to a post-Brexit UK for lessons on how to succeed.

His suggestion is unlikely to gain much traction but illustrates the country’s decline since Angela Merkel retired.

The euro is expected to decline further over the first quarter of 2025 as the ECN loosens monetary policy further.

On Tuesday, it closed at 1.0358, matching its lowest for the year.

Have a great day!