30 September 2024: Reeves is being urged to mean-test the state pension

One of the outcomes of the seemingly endless reviews of the economy and the state of the country’s finances has been the discovery that the country “can’t afford” the state pension in its current format.

During the election campaign, Labour said that it would consider scrapping non-dom status, which allows wealthy individuals to live in the UK and not declare their overseas income for tax purposes.

It is rumoured that doing away with the winter fuel allowance for millions of pensioners will not save as much as Reeves had hoped. It was reported yesterday that cuts to pensioner winter fuel payments will save hundreds of millions less than anticipated. However, her projected £1.4bn savings have been thrown into doubt, given that there had been a 152 per cent surge in claims for pension credit over the last eight weeks.

The Guardian has also reported that the Office for Budget Responsibility’s (OBR) initial forecast of three point two billion annual revenue from scrapping the non-dom tax status could be revised downwards.

It seems that the Cabinet’s desire to hit the ground running could well backfire, although in interviews the Prime Minister has the air of someone who is prepared to be unpopular now in the belief that he has five years to “mend bridges” and he is banking on the current criticisms as being a long-forgotten memory by the time of the next election.

In truth, next May will be the first test of public opinion, when several elections for councils and Metropolitan areas will be held.

It is rumoured that doing away with the winter fuel allowance for millions of pensioners will also not save as much as Reeves had hoped. The Observer reported yesterday that cuts to pensioner winter fuel payments will save hundreds of millions less than anticipated. However, her projected £1.4bn savings have been thrown into doubt, given that there had been a 152 per cent surge in claims for pension credit over the last eight weeks.

Almost all of Britain’s growth in the past five years has been driven by just two superstar sectors, laying bare the task facing Prime Minister Keir Starmer to revive swathes of the economy.

Official data shows an outsized contribution from technology and science-based industries is concealing a two-speed recovery, where sectors from hospitality to manufacturing are struggling to expand.

Thirty per cent of sectors which contribute twenty per cent to the country’s GDP are still reporting turnover below that of 2019.

However, British retailers reported the fastest growth in sales since May this month and see a further modest expansion for October, the Confederation of British Industry said on Friday, in contrast to other more downbeat surveys of consumer sentiment.

The CBI said its monthly retail sales balance rose to +4 in September from -27 in August, while retailers’ expectations for the month ahead rose from -17 to +5, their strongest since April 2023.

However, several large retailers report that their sales have been lower than they would expect at this time of year, and it is only sales promotions that are making the numbers palatable.

The Pound had another strong week last week, rising to a high of 1.3434 versus the dollar, although it appeared to run out of steam as the market digested the implications of the seeming divergence of monetary policy between the UK and the U.S.

With the election only a little over a month away, economists are fearing that Donald Trump’s insistence that he wants to be more involved in setting monetary policy could backfire on the economy.

He has said that if he is elected, he would ensure that any changes to monetary policy would be subject to Treasury scrutiny and Presidential oversight.

A new study by the Peterson Institute of International Economics, a renowned non-partisan think tank, found that such an idea could have catastrophic economic consequences. The study’s lead researchers dug into the economic impact of three of Trump’s campaign promises: mass deportations, tariffs, and eroding Fed independence.

Were he to triumph in November, Trump’s eroding of Central Bank independence could lead to $304 billion less in growth over his entire Presidency.

While Trump has not specified exactly how he would interfere in the Fed, the researchers assumed he is successful and pressured the bank into jacking up growth, they found that such action would result in lower GDP and higher inflation well past 2030.

While the move would raise GDP in the short term, it would soon see inflation rise as input costs increased, and the dollar would suffer immeasurably as interest rates tumbled and became “out of synch” with other G7 nations.

Ironically, it means the rest of the world gets this “free lunch” because all that capital that would have gone into building America’s future growth would now get invested somewhere else, mainly in Canada, Mexico, and China, as well as Australia.

The appetite of Federal Reserve policymakers for another large interest-rate cut in November may come into better focus in the coming week as Jerome Powell addresses economists and the government issues new employment numbers.

Jerome Powell will discuss the US economic outlook at a National Association for Business Economics conference later today.

At the end of the week, the September jobs report is expected to show a healthy, yet moderating, labour market. Payrolls in the world’s largest economy are seen rising by 140,000, based on the median estimate in a Bloomberg survey of economists.

On Friday, the latest data for personal consumption expenditures was published. This is Powell and the rest of the FOMC’s favoured gauge of inflation since it is a “broader” measure.

PCE was 202% in August, down from 2.5% in July. This encouraged the market to consider a further cut in interest rates when the FOMC meets on November 7th.

The dollar is still subject to speculation about the Fed’s proactivity compared to the rest of the G7. It fell to a low of 100.16 last week and closed at 100.42.

Christine Lagarde is not considered to be a reliable source of economic information, since many of her pronouncements have become subjective opinions given “off the cuff” with little or no basis.

Her latest view that the global economy is headed for a 1920s-style depression appears to be way off and is at odds with the current narrative of a soft landing for the global economy.

Lagarde, as a former CEO of the IMF, should command respect for her opinions, but as President of the ECB, she is often wide of the mark. It is almost as if she is not present at meetings of the Central Bank’s Governing Council or zones out to allow the bureaucrats to have their say.

Several times recently, she has allowed her personal view of the Eurozone economy to replace the majority view of colleagues.

The Governing Council appears to have provided the market with some practical and usable advance guidance recently, only for Lagarde to “throw a spanner in the works”.

One interest rate cut per quarter has been the market’s read of the recent comments from council members. Even arch-hawk Isabel Schnabel has been more “practical” in her comments recently, seemingly accepting the need for monetary policy to be loosened since disinflation is “on track”.

In a significant departure from her “blinkered” approach to inflation, Schnabel has spoken recently of her concerns that the Eurozone economy is stagnating.

In a presentation last week, she spoke of her concern that the economy is slowing and employment, while currently resilient, is beginning to soften and this could be followed by stagnation.

She is also concerned by the level of services inflation, and even though loan rates have come down, lending is still “muted”.

Private consumption is likely to be the main driver of any growth seen before the end of the year, but here are optimistic signs for 2025. The German economy is likely in recession and requires “structural repairs”.

The European Commission is still considering Mario Draghi’s report on the need for increased competitiveness. Europe is fundamentally unprepared to navigate a fast-changing global environment characterized by rising geopolitical tensions and rapid technological transformation.

In typical fashion, the politicians are likely to allow the situation to worsen before adopting any of Draghi’s suggestions, as they continue to adhere to a policy of unanimous agreement on the way forward.

The euro is still close to its high for the year as the ECB considered further rate cuts despite the recent rise in inflation,

Last week, it rallied to a high of 1.1213 but showed signs of running out of steam and fell back to close almost unchanged at 1.1164.

Have a great day!