It’s Budget Time

Ever since Labour’s election victory on the 4th of July, there has been intense speculation about their first budget and endless announcements from PM Keir Starmer and his top team about the need for ‘difficult decisions’ and ‘tough choices’.

Finally, for better or for worse, we are now just days away from Chancellor Reeves’s announcement on Wednesday, 30 October.

Currency Exchange Rates Update

The Pound remains at the top end of its 30-month trading range against the Euro.

Against the US Dollar, the Pound has lost over 3% of its value during October but is still over 7% stronger than this time last year.

What’s in the news?

UK

Deutsche Bank are forecasting "an historic budget... we expect the Autumn Budget to contain the largest single increase in net spending (outside the pandemic) since the Office for Budget Responsibility's (OBR) inception at ￡35bn" and on the tax side of things, they expect the Autumn Budget to be the second largest tax-raising fiscal event since 2010.

Yet the impact of all this talk of ‘tough budgets’ and ‘difficult decisions’ has already taken a toll on the Uk economy.

The latest UK PMI data showed UK private sector growth slipping to an 11-month low in October. Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said, “Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending.”

Meanwhile, PwC, one of the big four largest international accounting and professional services firms said the UK is suffering from a “vibecession” ahead of the Budget with household sentiment deteriorating despite improving economic fundamentals.

The firm’s latest consumer sentiment survey fell to its lowest point this year.

The deterioration was led by over 65s, who became the least optimistic age group for the first time since 2016, likely as a result of the cut to the winter fuel allowance and the rumoured changes to inheritance tax and tax reliefs on pension contributions.

PwC’s report is the latest survey to show that consumer confidence has fallen sharply since Labour took office in July with many economists suggesting the government’s rhetoric has been excessively gloomy, which has negatively impacted investment and spending decisions.

Good news

The IMF (International Monetary Fund) is predicting the UK economy will grow by 1.1% this year. This is more than double its estimate of 0.5% just six months ago and represents the biggest upgrade of any G7 economy this year.

Not so good news

Speculation over the government’s plans to increase capital gains tax are a “dangerous game” according to the CPS (Centre for Policy Studies).

The CPS point out that the charge, which raised ￡14bn last year makes 80% of its revenue from just 38,000 people, meaning its particularly sensitive to behavioural changes and could end up costing the government revenue.

Indeed, the Treasury’s own estimates suggest the raising of capital gains tax by 10% would lower revenue by ￡2bn over three years, if no other reforms were implemented alongside.

The IFS (Institute for Fiscal Studies) reported that one in ten adults of working age are on sickness benefits amid a surge in claims for mental health conditions.

British businesses are set to face around ￡5bn in additional costs annually as a result of the new workers’ rights legislation, with smaller businesses in hospitality and retail set to be hit the hardest.

Car production in the UK fell by 20.6% year-on-year in September, marking a significant decline.

USA

Hedge funds and asset managers reduced their bets against the US dollar in the second week of October by around $8 billion, their biggest move in three years ahead of the US election due on 5 November. This is the biggest shift in sentiment since 2021.

The resilience of the US economy, a reduction in Federal Reserve interest rate cut expectations and improved polling for Donald Trump to win the US election are all bullish factors driving demand for the US dollar.

The 10-year Treasury yield rose above 4.2% for the first time since July, setting off a surge in borrowing costs around the globe. The Ice BofA MOVE index which measures expected debt-market volatility is now around its highest of the year.

Donald Trump’s campaign said it had filed a formal complaint accusing Labour of making “illegal foreign campaign contributions and interference in our elections”. It comes after Labour Party staff organised a trip last week for almost 100 activists to campaign for Ms Harris in several critical battleground states.

The EU

October’s ECB policy meeting marked a firm shift in its focus away from inflation towards growth concerns in the Eurozone. For the third time this year, the ECB reduced its benchmark interest rate by 0.25%, lowering the deposit rate to 3.25%. The latest cut represents the first consecutive rate cut from the ECB in 13 years in an unanimous decision by the ECB ruling council.

The IMF downgraded its outlook for Germany, forecasting that Europe’s biggest economy would stagnate in 2024.

Others

Over 77% of Russia’s foreign currency reserves sits in Euroclear, Brussels. The EU is unable to legally seize those reserves but has come up with EUR €35 billion to help Ukraine internationally by borrowing it secured against the Russian reserves held in Brussels. Repayments and debt service will be from the income on those reserves neatly avoiding any liability for the EU and making Russia pay. The funds can be deployed in any way that Ukraine sees fit including the purchase of weapons.

Reserve Bank of India (RBI) Governor Shaktikanta Das said he expects a growth rate over the next few years of 7.5% for India, “with upside possibilities.”

Quote

Abraham Lincoln, “The best way to predict your future is to create it”