7 January 2025: Business morale is at its lowest since the “Truss era”

The UK may slip into a shallow recession during the first half of 2025 as the economy grinds to a halt, inflation remains an issue, and the Bank of England has to leave rates on hold to combat rising prices.

However, by the end of the year, it is expected that the economy will have grown by 1.7% as consumers gain more confidence, although there are several imponderables which make it a year which is more difficult to predict particularly since the Chancellor is inexperienced when it comes to making binding decisions that will drive the economy.

The government’s plans are laudable; building 1,5million new homes, cutting NHS waiting lists, tackling crime and putting in place workable targets for legal immigration while smashing the gangs who prey on vulnerable refugees.

However, it may have bitten off more than it can chew since it may take almost the entirety of this Parliament for the economy to see sustainable growth, which is what the Government is relying on if taxes are not to be raised again this year.

A recent business survey showed that British companies are the gloomiest since former Prime Minister Liz Truss’ September 2022 “mini-budget”, following large tax increases in the new Labour government’s October budget.

The British Chambers of Commerce, which conducts the largest private-sector survey of British firms, said businesses were the least happy about taxation, while confidence about sales over the next 12 months was the lowest since late 2022.

The BCC said 55 per cent of firms planned to raise prices, up from 39 per cent the quarter before, while 24 per cent intended to cut investment, up from 18 per cent previously. It plans to release survey data on recruitment intentions on January 14.

The downbeat mood echoes that in other surveys of businesses from S&P Global, the Institute of Directors and the Confederation of British Industry.

Gross mortgage lending edged up in November to £20.7 billion, a modest increase from October’s £20.3 billion, according to the Bank of England’s latest Money and Credit report.

However, this rise in lending was accompanied by a dip in mortgage approvals, suggesting potential turbulence in the housing market.

Mortgage approvals for house purchases dropped by 2,400 in November to a total of 65,700, though this figure remained above the 12-month average of 60,400. Remortgage approvals also fell slightly, down by 300 to 31,200, which was still higher than the previous 12-month average of 30,000.

Housing market experts attributed the decline in approvals to waning consumer confidence following the recent Budget announcement.

Confidence is still a crucial factor across many sectors of the economy. The Prime Minister went on the attack yesterday, defending his record when he served as Director of Public Prosecutions. He has come under severe attack from Elon Musk, who is using his ownership of social media platform X to call for his resignation.

The pound recovered a significant part of its losses from last week, as uncertainty continued to drive increased volatility. It climbed to a high of 1.2551 and closed at 1.2519.

During the Brexit campaign and referendum in the UK, which is now more than eight years ago, there was almost a feeling of denial in the country since large numbers of the population were in denial that the country could decide to leave the European Union.

There is a similar view regarding the issue of tariffs that Donald Trump has threatened after he is confirmed as President in less than two weeks.

Although no one believes that he could seriously add up to 25% tariffs to the import of finished goods into the U.S. from some of America’s largest trading partners, there are aides already actively working on proposals that will be ready for adoption as soon as the end of this month.

Reaction from China, Canada and Mexico, America’s largest trading partners, has been to treat the threats as little more than sabre-rattling from a President who is well-known for his expansive threats which rarely come to fruition.

As the inauguration moves closer, there has already been one political casualty, as the Canadian Prime Minister, mockingly called the Governor of the 51st State by Trump recently, resigned citing the likely adoption of tariffs as the final straw in his country’s economic decline.

The concept of tariffs can either be done with a broad brush, which was talked about during the election campaign, or they can be applied more targeted to protect critical industries in the United States. It appears the latter seems to be moving forward, and that’s something the market would celebrate.

This week is packed with economic data and speeches from Federal Reserve officials. Investors will look for clues on the pace of monetary policy easing this year.

Later in the week, the focus will be on a key monthly December employment report.

While Trump’s proposals could boost corporate profits and energize the economy, they also run the risk of placing upward pressure on inflation. Fed Governor Lisa Cook was the latest among several policymakers to caution that inflation risks remain in the new year.

U.S. markets will be closed on Thursday as the nation marks a day of remembrance for President Jimmy Carter, who died recently.

Today will see the release of output data published by ISM. The most critical of the reports is services PMI, which is now expected to have grown to 53 in December, up from 52.1 in November. This is a slight moderation in market expectations from last week.

The dollar index lost ground yesterday as the traders saw that the Greenback had moved into overbought territory, which drove a bout of profit-taking.

It fell to a low of 107.75 and closed at 108.24.

The ECB is still fragmented with members of its Governing Council looking at “localized” factors which drive their view on inflation, growth and overall monetary policy rather than studying the overall picture for the Eurozone as a whole.

This important lesson needs to be learned by the twenty Central Bank Governors who make up the rate-setting committee.

In the U.S. it would be highly unusual for, say, the President of the Boston or San Francisco Fed to be only interested in what is happening economically in their home state.

Until the Governing Council can look at the big picture for the entire region, their monetary policy decisions will be both lopsided and prone to doubt.

Although inflation has come down over the past two quarters, it is still causing a problem for the ECB.

Higher eurozone inflation in data due this week is likely to remind policymakers that while their 2pc goal might now be in sight, it’s not yet within reach.

The data due later this morning is expected to show that headline inflation grew by 2.4% in December, while the core grew by 2.7%.

There is still confidence that inflation can be lowered to the ECB’s 2% target, even as it continues to lower interest rates.

Lagarde faces a problem. If the Governing Council were to pause its current cycle of rate cuts to allow inflation to “catch up, and it stayed at an average of 2.3% to 2.5%, it would be difficult to sanction a return to looser monetary policy.

At such a juncture, the ECB would be pressured to admit that inflation had reached its nadir unless rates were to be increased again, which would spell disaster for the economy.

Sales of new electric vehicles in Germany plunged last year, official figures showed Monday, as a slow switch to battery-powered cars deepened the woes of the country’s flagship auto industry.

Just 380,609 EVs were registered in 2024 in Europe’s largest auto market, more than 27% fewer than in the previous year, the federal transport authority said.

After years of growth, demand for battery-powered cars lost momentum as the German economy struggled and key subsidies were withdrawn. The sudden end of the support programme in 2023 amid a government budget crisis had led to “massive uncertainty” among potential buyers. High prices for new EV models, still patchy charging infrastructure and range limitations were putting off new buyers in Germany, according to the regulator.

The euro had a better day yesterday as the pressure exerted by dollar strength subsided. It rallied to a high of 1.0436 and closed at 1.0387.

Have a great day!