UK descends into an atmosphere of gloom

Barely 2-months after the UK general election, with the Pound Sterling still riding high against the Euro and the US Dollar, an “atmosphere of gloom” has descended on the UK 6 weeks out from the new Labour government’s first Budget, due to be delivered by Chancellor Rachel Reeves on 30 October.

Currency Exchange Rates Update

The Pound to Euro exchange rate remains 1.69% up in the last 30-days and 1.96% up in the last 12-months.

Against the Dollar, the Pound is up 2.31% over the last 30-days and 5.08% up in the last 12-months.

What’s in the news?

UK

Polling by the More in Common think tank shows Prime Minister Sir Keir Starmer net approval rating now stands at minus 20 points, 31 points lower than his post-election high.

Luke Tryl, the UK director of More in Common commented “There are two drivers. The bit that isn’t Starmer’s fault is just that we have an electorate that is much less patient than it has been previously. But the bit he has more responsibility for, and I think Downing Street will want to think about, is: what is the positive message? I don’t think that in the period since he was elected, he’s communicated how Labour will make your life feel better very well. I think it’s also such a mistake for Labour to be stuck in this 2010 paradigm, where they think taking on the Tories on the public finances will be enough. People weren’t voting on public finances; they were voting on public services and thought the Tories had blown it. And it’s not just the Tories they can lose votes to – it’s the Greens, it’s Reform, it’s other parties. If Labour say, ‘the other lot are worse’, people will just say: ‘Fine, I’m going to vote for one of the smaller parties’.”

Buyer’s Regret? Sir Keir Starmer’s Labour party ( cosmoscurrencyexchange.com )

Former PM Tony Blair seems to concur suggesting Sir Keir Starmer should channel a bit more positivity in office. Blair said, “I think you get optimistic if you know where you're going, and I do think no one wants to get on a plane with a depressed pilot.”

Good news

There are over 24 million Small and Medium Sized Enterprises in Europe and collectively they employ 85 million people. The countries rated as being the most friendly or hospitable to new businesses are Ireland, Bulgaria, Netherlands, Sweden and the UK. Rachel Reeves’ Budget will determine whether the UK remains near the top of that table.

The UK RICS housing survey rose from -18% to +1% in August whilst UK lenders reported that mortgage approvals have reached their highest level since 2022.

Not so good news

Sir Keir Starmer’s Labour party has made much of a ￡22 billion black hole it claims to have found at the heart of the UK economy, using it to justify, among other things, the winter fuel allowance cuts. But in response to a freedom of information request submitted by the Financial Times, the Treasury refused to provide an exact breakdown of the figures. Treasury officials say they need more time to check the accuracy of the ￡22bn breakdown whilst Starmer is refusing to publish an impact assessment of the cuts raising questions that cut to the very foundations of Labour’s claims about the economy.

https://www.ft.com/content/7f686444-7036-4efc-82c5-971b0f3929fa

Jeremy Hunt, the shadow chancellor, commented “Labour’s bogus ‘black hole’ is falling to pieces. It’s simply a political smokescreen for their public sector pay awards and forthcoming tax rises.”

The OBR (Office for Budget Responsibility) is forecasting that government spending will rise from the current 45% to 60% of GDP with revenue remaining flat and warned that public finances will be set on an “unsustainable path” in the coming years unless the government acts.

The OBR is also forecasting that public debt would rise to over 270% of GDP by the mid-2070s, up from just under 100% at the moment, due to a big projected increase in public spending.

The OBR’s forecasts are based on stated government policy with the increase in public spending mainly driven by the transition to net zero, the costs of supporting an ageing population and increased geopolitical tensions putting upward pressure on defence spending.

Improving productivity would make the biggest difference, with every 0.1% increase in productivity growth reducing the rise in the debt-to-GDP ratio by 25%.

Goldman Sachs (GS) thinks the UK economy will be weak enough to force the BoE (Bank of England) into faster and ultimately deeper interest rate cuts, while Bloomberg Economics argues that long-term growth and productivity are looking even worse than officials would like to believe. GS is also forecasting tax hikes of ‘at least’ ￡20bn in Chancellor Rachel Reeves first budget with pension reliefs likely to be a major area of focus.

The ONS (Office for National Statistics) reported that the UK economy flatlined for the second month in a row in July. Analysts had expected modest growth of around 0.2%.

Growth was held back by the production sector, which includes manufacturing and the construction sector, both of which contracted in July.

Data released by the BoE (Bank of England) showed that the value of outstanding mortgages in arrears hit ￡21.9bn in the second quarter of this year, the highest figure since 2014 and a 32% increase on the same period last year. Mortgage arrears also surged by 50% to a seven-year high.

A report from BCG and the NHS Confederation says that since the pandemic, an extra 900,000 people have fallen out of the workforce due to long-term sickness making the UK the only G7 economy where the participation rate has not recovered to its pre-pandemic average.

The report estimates that reintegrating between half and three-quarters of those who have dropped out of the workforce since 2020 could unlock ￡35-57bn in revenue for the state over the next five years. The boost to growth would be substantial too, with GDP forecast to be 3% higher by 2029 as a result.

The ONS also reported that youth unemployment has surged to its highest level in three years with the unemployment rate for 18 to 24-year-olds rising to 13.3% in the three months to July, the highest since the three months to January 2021 at the height of Covid lockdowns.

A report by accountant BDO found that the strength of the jobs market declined for the 14th consecutive month in August, its worst month in more than a decade.

The Institute of Directors (IoD) economic confidence index plunged from a three-year high of +7 in July to -12 in August. The IoD represents 20,000 business leaders across the country, ranging from entrepreneurial small ventures to major corporations.

Anna Leach, chief economist at the IoD, said the slump in confidence among members was driven by “news flow in recent weeks on employment rights and autumn tax rises”.

A report from industry trade body Offshore Energies UK said plans to further increase the windfall tax on oil and gas profits and scrap tax breaks would virtually halt all further investment into the North Sea, drive investment overseas and cost the country ￡13bn.

The OBR said low-paid migrant workers are an immediate drain on the public purse, costing taxpayers an estimated ￡151,000 by the time they could claim the state pension at 66. They found that the average low-earner who came to the UK aged 25 cost the Government more overall than they paid in from the moment they arrived because low-paid migrants, who the OBR assumes earn half the average wage put more demand on public services such as the NHS compared to their relatively low-tax payments.

USA

Hiring rose in August but fell short of forecasts fuelling the ongoing debate over how much and not whether the Federal Reserve (Fed) should cut interest rates. The Bureau of Labor Statistics reported that the three-month average the lowest since mid-2020.

The latest US inflation data produced mixed news. The good news is overall inflation continued along its downward path toward the Fed’s desired threshold of 2% and is now at its lowest level since February 2021. The bad news is, when you strip out traditionally volatile items like food and gas (both critical to consumers), inflation went up.

US consumer sentiment is up a fraction, but a record number of US households is uncertain about the economic outlook. While the pace of inflation has cooled, prices remain much higher than before the pandemic with the consumer price index surging by 21.5% from the end of 2019. According to the latest data from the University of Michigan, the likelihood of a comfortable retirement is the lowest in a decade.

The mixed news has left traders unsure whether US interest rates will be reduced by 0.25% or 0.5% when the Fed next meet on 18 September.

CME’s Fedwatch reported a roughly 15% chance that the Fed will cut rates by 0.5%, down from nearer 30% before the release of the inflation data.

September has been the worst month for the S&P 500 over the last 10 years, averaging a loss of more than 1% during that time. The broad-market index has also posted a loss in September in each of the last four years.

The EU

The European Central Bank (ECB) delivered another 0.25% interest rate cut, marking its second reduction to the deposit rate this year after June’s 0.25% cut.

The widely anticipated move comes after a period of sluggish economic growth across the eurozone and cooling inflation, which fell back toward the central bank’s 2% target in August.

The ECB’s key interest rate now stands at 3.5%.

Previous ECB President Mario Draghi reported on Europe and how its economy needs to be energized. In 1995, the EU economy was 95% as productive as that of the USA; now it is 80%.

https://fortune.com/europe/2024/09/10/mario-draghi-economy-us-china/

Political risk is dogging Germany and France, the eurozone’s two biggest economies. Public approval of Germany’s government has sunk to a 14 year low after Chancellor Olaf Scholz’s coalition was hammered by populists of the right and left in regional elections. Germany’s euro-sceptic party, Alternative for Germany (AfD), is celebrating a big victory in the eastern state of Thuringia, its first win in a state parliament election since World War Two. AfD also came a close second in the more populous neighbouring state of Saxony. With federal elections only a year away, the AfD is second in national opinion polls, which might prompt calls for elections to be called early. In France, President Emmanuel Macron finally picked a prime minister, only to leave far-right leader Marine Le Pen and her party in the role of power broker.

Meanwhile, in Italy, illegal migration has dropped by 64% over the last year under the government of Giorgia Meloni.

Others

India is the world’s fastest growing major economy. Its economy grew by 8.2% in 2023 and is forecast to grow by another 6.6% this year.

Troubles continue to grow in China as core inflation cooled to the weakest in more than three years, providing further evidence that consumer demand is slowing in the world’s second-biggest economy.

Losses on China’s main stock market index, the CSI 300 have deepened to $6.5 trillion and it’s on the verge of falling to a five-year low.

Gold prices have hit another record high and rallied by about 25% so far this year, supported by the Fed rate-cut bets, central bank buying and renewed interest from retail investors.

Quote

Benjamin Franklin, one of the Founding Fathers of the USA “Well done, is better than well said”.