3 January 2025: New Year positivity is lacking as polls attack Labour

Today’s edition of The Financial Times leads with a headline voicing concerns that economists believe the current insipid growth level will almost certainly lead to tax rises.

The Labour Party came to power, gambling everything on its ability to inject a level of growth into the economy that would see tax revenues rise to a level that would enable it to fund an ambitious level of public spending and investment that would negate the need to raise again.

In her first budget last November, Rachel Reeves said that the state of the country’s finances, which she discovered when she took office, forced her to raise. Employer’s National Insurance Contributions, charge VAT on private school fees, lower the level at which farmers begin to pay inheritance tax and means-test the Pensioner’s Winter Fuel Allowance.

These measures have all been criticized as being badly considered, particularly the final two, which have been considered “spiteful” and aimed directly at core Conservative Party supporters.

A “YouGov” poll which asked participants to assess Labour’s first six months in power was particularly scathing. It found the Government to be “incompetent and dishonest” while most participants believe that Sir Keir Starmer will fail to achieve most, if not all, the six milestones he set for his Cabinet last month.

Starmer has quickly discovered that governing is a different proposition from being in opposition.

According to a new survey, mounting cost pressures have sent a “winter chill” through British factories, which posted the weakest growth in nearly a year last month. The final S&P Global purchasing managers’ index (PMI) for the manufacturing sector slipped to 47 in December, down from 48 in the previous month and lower than an earlier estimate of 47.3. The December reading was the lowest for 11 months.

The latest fall pushed the PMI further from the 50-point threshold separating growth from contraction. The survey has remained below this mark for three months in a row, signalling that British factories scaled back production in the final quarter of last year.

Business sentiment is now at its lowest for two years, as the new government’s rhetoric and announced policy changes dampen confidence and raise costs at UK factories and their clients alike. Some companies are acting now to restructure operations in advance of the rises in employer national insurance and minimum wage levels in 2025, according to the Business director of S&P.

The news sent Sterling, which was already suffering given the market’s expectations that President-elect Trump would introduce a range of protectionist policies, into something of a tailspin, falling to a low of 1.2352, closing at 1.2572.

G7 Central Banks have been trying to ensure that they have choices when deciding when to loosen monetary policy, but the latest data makes more cuts from the Bank of England changes the landscape considerably.

At its December meeting, the Federal Open Market Committee lowered the target range for the policy interest rate by 25 basis points, to 4.25–4.50 per cent, as widely expected by the market.

As also expected, the FOMC signalled it expected to continue loosening monetary policy in 2025, albeit through two rate cuts rather than the four cuts it had projected in its September forecast.

Jerome Powell, the Chair of the Federal Reserve, is expected to tread carefully over the next two or three months, since any action, or inaction, on monetary policy is sure to attract the attention of the President-elect.

Donald Trump is known for speaking first and considering the impact of his words later, so his comments about diluting the independence of the Federal Reserve have not been taken seriously.

When taken in isolation, people may find it odd that one of the most significant economic decisions is taken without any input from the President.

However, interest rates, budgets, government borrowing and the Federal Budget are such motivational issues that they are subject to political pressure which may not make the decision-making process impartial.

It is unclear whether Trump will want to go through the process of loosening the Fed’s independence, a barrel he may well not be able to win.

The Fed and the Treasury are assumed to be “on the same page”, and Scott Bessent, the incoming Treasury Secretary and Elon Musk, the “minister of Efficiency”, are charged with bringing government borrowing down.

With the end of the year, several FOMC members lose their voting rights while others will now become voting members,

Austan Goolsbee of the Chicago Fed will now be a voting member, which gives his comments more relevance, as will Susan Collins from Boston.

Daly, Barking and Bostic will all lose their voting tights this year.

Neel Kashkari, from Minneapolis, was not a voting member last year and won’t be this year but will remain one of the go-to FOMC members for comment.

The dollar index was boosted by poor economic data from G7 nations yesterday, as well as a surprising fall in the number of jobless claims. This encouraged investors to believe that next week’s employment report for December will be better than expected, although that is far from certain.

The dollar index rallied to a high of 109.56 and closed at 109.25.

Lagarde believes that the ECB has made considerable progress in driving inflation lower, but she still feels that there is work to be done, despite the low level of current economic activity.

While Lagarde struggles to look at the European Union as one complete unit, market sources prefer to split it into either geographic or political units.

2024 was a difficult year for the Eurozone, as its largest economies, Germany and France, faced political and economic turmoil, meaning that neither has a budget for 2025.

Economists say the trajectory for both countries is worrying, warning that a lack of growth, fiscal imbalances and political intransigence could lead to a decline and a loss of prestige for Europe as a whole.

The German economy is set to decline for the third year in succession, its longest decline in modern history, while the new Economy Minister in France is determined to create a budget that can be agreed upon by warring political enemies.

Economists say the trajectory for both countries is worrying, warning that a lack of growth, fiscal imbalances and political intransigence could lead to a decline and a loss of prestige for Europe as a whole.

The situation today is different from earlier crises in the sense that Europe’s most acute problems are no longer concentrated in smaller economies like Greece. Instead, it is Europe’s two most important economies that are being tested.

Debt is not the most significant problem, although the market’s attitude to the ballooning French budget deficit has been remarkably sanguine.

It is hard to see how the region will generate sufficient growth to enable it to compete with China, while the threat of tariffs on exports to the U.S. will be a most unwelcome addition.

The Euro fell to a low of 1.0224 yesterday but attracted some “bottom feeders” as it recovered to close at 1.0264.

The divergence in economic outlook between the U.S., and the rest of the G7 is becoming ever starker, but it pays to be cautious in the markets which all point in one direction.

Have a great day!