6 December 2024: Starmer says he hasn’t “watered down” election pledges

In a keynote speech yesterday, the Prime Minister set out (again) the six pledges against which he wants his government to be judged at the end of the current Parliament.

In what felt like a repeat of his manifesto launch nine months ago, Keir Starmer promised change as he outlined his government’s “milestones”, but bringing migration down failed to make the list.

Some of the six pledges will take more work to achieve than others. For instance, building 300k new homes a year to reach his 1.5 million target in five years will mean that house building will need to be at a level which has not been seen for decades.

Between 200k and 220k new homes have been built a year since 2000, so to achieve 300k is a near impossible ambition.

Securing the Government’s green energy target also appears unlikely with close to double the output from wind and solar needed, while removing fossil fuels from all electricity generation by 2030 seems unlikely.

The other milestones are around early years’ education, reforming the justice system, cutting NHS waiting lists, and securing a level of economic growth on a par with the richest nations globally.

When asked why cutting immigration didn’t make the list, Starmer informed his audience that he believes that controlling the number of people coming to the country, either legally or illegally, was the minimum foundation on which his pledges will be built.

He was immediately accused of watering down the pledges he promised in his election campaign. He naturally denied this, although, after a bumpy start to his time in Government, it looks very much like an emergency reset.

There was some good news for the Government from City Banks, as economists believe that the UK economy will grow at least twice the rate of the European Union over the next two years.

Analysts at ING have pointed to an estimated growth of 1.4 per cent for Britain’s GDP in the coming year, outlined in the bank’s annual economic outlook, meanwhile predicting a mere 0.7 per cent increase for the Eurozone economies.

However, even at 1.4% growth, it will be touch and go if that will be sufficient to generate sufficient tax revenue to allow Rachel Reeves to bring down Government borrowing and increase public spending on essential services.

Data for construction output was published yesterday. Activity in Britain’s construction industry picked up in November, but housebuilding weakened, throwing the government’s new homes targets into further doubt.

Robust demand for commercial and civil engineering projects offset the contraction in residential housebuilding, underlining the industry’s sensitivity to interest rates and consumer sentiment.

Housebuilding activity declined at its steepest rate since June, with a reading of 47.9, as construction companies reported high borrowing costs and fragile consumer confidence had hit demand.

The pound climbed to its highest level for three weeks as the dollar lost more ground. It reached a high of 1.2770 and closed at 1.2751.

Every month the market believes that the previous month’s employment data will be a watershed moment for the Federal Reserve, and every month Jerome Powell comments that job creation, while a key factor in the FOMC’s considerations, is just one more factor in its deliberations.

The non-farm payrolls for November which will be published later today have been even more unpredictable than usual over the past six months, portraying an economy that is headed for a recession one month, only to produce close to record numbers the next.

Powell understands he needs to tread a cautious path, not wanting to loosen monetary policy too much for fear of spooking the market into fearing a more significant slowdown, while not wanting to abandon the fight against inflation which remains stubbornly above the Fed’s target.

In a speech yesterday, Powell said that he believes that the economy is in a “remarkably good state.”

Several of his colleagues on the FOMC have spoken this week about their voting intentions, and they appear to have convinced the market that a cut at the December 18th meeting will happen.

St Louis Fed President Alberto Musalem told reporters that he expects the U.S. central bank will be able to continue to cut interest rates, but isn’t ready to say what he thinks should happen at its policy meeting later this month.

With inflation likely to continue to ebb to the Fed’s 2% target over time, “additional easing of moderately restrictive policy toward neutral will be appropriate over time,” Musalem said at a Bloomberg monetary policy conference.

Meanwhile, Powell chose to concentrate on Fed independence.

He believes that Independence lets the Fed make decisions for all Americans, not any political party, and there is broad support in both parties for an independent Fed. “I do not think there is a risk of losing it.”

He did, however, say that unemployment is low by historical standards, even as interest rates have remained high for a considerable time.

Productivity is rising even as inflation and the labour market are cooling which is allowing the Fed to be watchful over interest rate cuts.

The dollar index has continued to lose ground as the divergence in monetary policy between the U.S. and Europe appears to be stalling.

It fell to a low of 105.70 yesterday and closed at 105.72. Given the political turmoil in France and, to a lesser extent, Germany, it is curious that the market is still apparently concentrating on monetary policy divergence.

Political turmoil in France shows no sign of abating as under pressure President Emmanuel Macron addressed the nation on TV last evening and promised that he would announce a new Prime Minister in the next few days.

Prime Minister Michel Barnier resigned yesterday in the wake of his Centre-right coalition’s defeat in a vote of no-confidence on Wednesday evening, although he will stay on until a successor is named.

Barnier forced through a severe austerity budget, which would have seen up to sixty billion euros in cuts in public services and increased taxation. While any cuts to public services are anathema to the political left, Marine Le Pen’s far-right National Rally Party also rejected the proposals.

Le Pen is accused of embezzling EU funds and faces a trial in the spring, at which time she will be banned from public office for five years. If convicted, she will not be able to stand in the 2027 Presidential Election, in which she is the favourite to win.

The ongoing political concerns in both France and Germany have seen the single currency struggle to gain any ground in the past months, even as G7 Central Banks all appear to be committed to lowering interest rates.

Italian Q3 GDP has remained stable, but manufacturing and services PMI data showed significant contraction across the eurozone, particularly in its three largest economies. These poor figures have added to concerns about the region’s economic outlook, putting sustained pressure on the Euro.

The European Central Bank (ECB) has signalled a dovish stance, suggesting potential interest rate cuts at every meeting through mid-2025 to support the struggling economy.

However, the likelihood of a larger 50 bps cut has diminished to just 8%, as markets digest recent data and commentary from policymakers. ECB President Christine Lagarde reinforced the negative outlook during her testimony to the European Parliament, highlighting the challenges ahead for the Euro and the region’s economy.

Lagarde and Bundesbank President Joachim Nagel disagree about the need for common financing to support lending and structural improvements in the region.

Lagarde said yesterday that such policies are “desirable,” while Nagel said that financing common spending through common debt is ‘not a near-term goal.’

German Carmaker Volkswagen plans to make massive cuts to its workforce, triggering a strike by its employees. The crisis at VW is another symptom of the deepening troubles in the German economy, which has for many years been sufficiently strong to “carry” the rest of the European Union through several periods of turbulence.

Now in desperate need of structural reform, Germany faces at least one more year of minimal growth as it battles competition in its traditional export markets and the introduction of tariffs by the incoming American Administration.

The euro has benefitted this week from the markets’ belief that there will at least be some short-term convergence of monetary policy between the U.S. and the Eurozone.

It rallied to a high of 1.0587 yesterday and closed at 1.0584, although it now seems to be running into an area where there are significant orders to sell.

Have a great day!