Is the UK Having Second Thoughts? Post-Election Shifts and Economic Updates

Just eight weeks after the 4 July General Election, there are signs that the UK may be experiencing "buyer's regret" over its decision to elect Sir Keir Starmer's Labour party. An Ipsos opinion poll conducted between August 9 and 12 shows that 52% of people believe the UK is heading in the wrong direction. Additionally, Sir Keir's approval rating has fallen from a post-election high of plus seven to zero, suggesting growing public dissatisfaction with the new government.

Currency Exchange Rates Update

The Pound hit a 6-week high against the Euro on Friday, a level it’s only been above for 16 days of the past two years.

Last Tuesday, the Pound hit its highest level against the US Dollar since March 2022.

It’s all about interest rate differentials. The markets expect the Bank of England (BoE) to be more cautious about the scale and timing of further UK interest rate cuts than their main counterparts, the Federal Reserve (Fed) in the USA and European Central Bank (ECB) in the EU.

What’s in the news?

Other than interest rates, the news cycle is currently dominated by speculation over the content of the new Labour governments first budget, due on 30 October.

The new Labour government in the UK, under Sir Keir Starmer, is considering a wealth tax to fund recent public sector pay increases, such as a 22% raise for junior doctors and a 15% raise for train drivers, instead of increasing borrowing. While a wealth tax could seem politically feasible, especially with backing from Labour's largest union, Unite, it is controversial. Critics point to the example of France, where a wealth tax introduced in 1982 contributed minimally to tax revenue and led to capital flight, ultimately being abolished in 2017. Moreover, wealth taxes are viewed as double taxation on already taxed income, potentially discouraging savings. The UK already has a highly progressive tax system, with the top 1% of earners contributing nearly 30% of income tax receipts. That is more than the combined total of the next 20m taxpayers.

https://ifamagazine.com/aj-bell-starmer-lays-groundwork-for-tax-rises-as-painful-decisions-set-to-be-made-in-october-budget/

UK

Good news

The UK economy remains a "bright spot" in Europe amid continued weakness in the Eurozone, with the latest PMI surveys showing growth from 52.8 in July to 53.4 in August, indicating expansion. This growth is driven by improving domestic demand and increased business confidence, which led to the fastest employment growth since July 2023. UK business confidence is at a near nine-year high, with Lloyds Bank's Business Barometer at 50% in August, the highest since November 2015. The UK economy grew by 0.6% in Q2 2024, continuing its rebound from a shallow recession last year, supported by falling inflation and the BoE's first interest rate cut since March 2020. The UK has also secured accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which will come into effect by December 15, 2024, allowing over 99% of UK goods exports to CPTPP members to be tariff-free. This agreement, negotiated by Kemi Badenoch, the former Conservative Business and Trade Secretary of State in the Sunnak government will now officially enter into force by 15 December 2024 and could boost the UK economy by ￡2 billion annually by 2040. Additionally, shop prices fell by 0.3% in August compared to a year earlier, reflecting easing inflation pressures.

https://www.gov.uk/government/news/uk-to-join-cptpp-by-15-december

Not so good news

Chancellor Rachel Reeves, who previously stated there were "no plans to raise capital gains tax," is now expected to present a tough budget in October, with PM Keir Starmer hinting that "those with the broadest shoulders should bear the heavier burden." This has raised concerns that Reeves might increase capital gains tax to align with the top income tax rate of 45%, potentially generating ￡16.7 billion but making the UK the most punitive country in Europe for capital gains tax.

The City of London has expressed alarm, with fears that such a hike could drive away entrepreneurs and deter investment. Gerard Lyons, Chief Economic Strategist at Netwealth, warned that a loss of confidence could harm spending and investment. Another potential target is a new bank windfall tax, causing bank shares to fall on the FTSE 100.

Despite promising a more restrained government, Starmer is considering extending the indoor smoking ban to outdoor areas, provoking backlash from the hospitality sector. Kate Nicholls of UKHospitality warned of economic harm, recalling the wave of pub closures following the original smoking ban.

The return of Big Government: Sir Keir Starmer ( cosmoscurrencyexchange.com )

Starmer has also suggested a rise in fuel duty, which has been frozen for 14 years. Additionally, the new energy price cap announced by Ofgem will increase household bills by 10% this October, posing a challenge for the government following its decision to end the winter fuel allowance for pensioners.

Meanwhile, Energy Secretary Ed Miliband is not opposing a climate lawsuit against two major North Sea oil projects, raising concerns among energy industry leaders about potential job losses due to recent tax policies targeting oil and gas.

USA

Fed Chair Jerome Powell announced that the time has come for the Fed to cut its key policy rate, more than two and a half years after it began raising borrowing costs to combat inflation. This move aligns with expectations that the Fed will lower rates at its next meeting on 18 September. Powell emphasized that the Fed's focus is shifting from curbing inflation to protecting jobs and mitigating economic weakness. Recent data from the Bureau of Economic Analysis showed mild increases in the Fed's preferred measure of underlying inflation and a rise in household spending in July. On a three-month annualized basis, inflation rose by 1.7%, the slowest pace this year, reinforcing the case for a rate cut in September.

The EU

Spanish inflation has recently become more significant for the EU's interest rate policy, especially with Germany's economy stagnating. Spain's harmonized annual inflation rate of 2.4% has fuelled speculation that the ECB might cut interest rates at its next meeting on 12 September. Meanwhile, Germany's economic outlook has worsened, with a 0.1% GDP decline in the second quarter, a drop in consumer sentiment, and a surprising decrease in inflation to 2% in August.

In France, President Emmanuel Macron's refusal to appoint a Prime Minister from the Left-wing coalition has sparked political turmoil. This decision has led to a heated debate, as France is now governed by what critics call a "zombie" government. Under the French constitution, the president can choose the prime minister, but traditionally, the PM is from the majority in the National Assembly, which can force the government's resignation through a no-confidence vote. Although the Left bloc won the most seats in July's election, it did not achieve the 289-seat majority needed in the 577-seat National Assembly.

Others

This year, $15 billion in investment has been withdrawn from China as investors reassess the risk-reward balance, with Germany being a notable exception. Germany invested an additional $4.8 billion in the second quarter of 2024, bringing its total investment in China to $7.3 billion despite concerns over China's struggling property market and economic growth.

https://www.dw.com/en/germanys-investments-in-china-increase-despite-warnings/a-69957810

Meanwhile, protests in China have risen as the slowing economy causes unrest, with cases of dissent increasing by 18% in the second quarter compared to the same period last year, according to the China Dissent Monitor by Freedom House. The country faces multiple economic challenges, including a real estate crisis, a trade war with the US, private sector crackdowns, and the aftermath of strict pandemic lockdowns, which have dampened growth and confidence.

Additionally, China's fiscal health is weakening, with broad budget expenditure contracting and revenue from land sales for local governments falling at a record pace. This has led to increased pressure on Beijing to introduce stimulus measures to support the faltering economy.

Quote

George Bernard Shaw, was an Irish playwright, critic, polemicist and political activist “People who say it can not be done should not interrupt those who are doing it.”