15 February 2025
by Tony Redondo
The German federal elections are scheduled for next Sunday, 23 February and the betting is that Friedrich Merz, leader of the CDU (Christian Democratic Union) will be the new chancellor. If the AfD (Alternative for Germany) gets into government, it will be a big political shock in by far the biggest economy in the European Union.
The EU encompasses 27 countries with Germany, France and Italy accounting for 53% of the EU’s $19 trillion economy. Add in Spain and the Netherlands and those 5 countries encompass 68% of the EU economy.
The German economy is larger than the combined total of the 20 smallest EU economies but has not grown in the last six years and is facing its third consecutive year of recession in 2025. It’s Germany’s worst bout of economic stagnation since the Second World War.
Currency Exchange Rates Update
The Pound was little changed against the Euro last week, trading within a narrow 0.6% trading range all week and remains at the top end of the trading range of the last three years.
Better news against the US Dollar where the Pound hit a 2025 high on Friday. The Pound has gained over 1% in the last week and over 3% in the last month against the Dollar.
Next week is a heavy economic data week for the UK economy with the latest employment, wages, inflation, housing, retail sales and PMI Manufacturing data. Analysts expect both the unemployment and inflation rates to have risen again in another sign that the UK economy is in stagflationary times.
What’s in the news?
UK
The latest poll by Find Out Now puts Reform UK on 29%, unchanged from the week before with Labour down two points on 23%; the Tories on 21%; the Lib Dems on 12% and the Greens on 9%.
Reform UK leader Nigel Farage said “Can Reform win the next election? Well, the history books say no, but I just feel something remarkable is going on, something really historic, something we’ve never seen in our lifetimes. Probably the last time you saw a movement like this was in 1918 when Labour suddenly emerged as a massive political party and the Liberals disappeared as a party of government. There is a good chance I could be the next prime minister.”
Good news
The ONS (Office for National Statistics) reported that the UK economy expanded unexpectedly at the end of last year, despite Rachel Reeves’s £40bn Budget tax raid with the UK’s GDP (Gross Domestic Product) rising by 0.1% in the three months to December after recording zero growth in the previous three months. The better than-predicted quarterly outcome came courtesy of a solid 0.4% month on month rise in December output which despite soft monthly growth outturns in October and November meant theUK economy avoided ending the year with a quarterly contraction in GDP. Nevertheless, coming after the zero-growth outturn in the third quarter of 2024, this modest rise in the fourth quarter still indicates that the UK economy was largely stagnant in the second half of 2024.
Egdon Resources is to formally announce at an energy industry conference later this month that it has discovered a giant gas field near the market town of Gainsborough, Lincolnshire that could power the UK for a decade. Its preliminary work suggests that the gas field find is so large that it could benefit the whole UK economy, boosting growth through more jobs, increased tax revenue and cheaper energy. If subsequent drilling confirms the scale of the find, it is likely to reignite the debate about fracking. Energy Secretary Ed Miliband responded with a pledge to permanent ban fracking.
Not so good news
The OBR (Office for Budget Responsibility) has found that Chancellor Rachel Reeves is on course for a Budget deficit thanks to her decisions, something that would break a key promise made by the Chancellor in her budget of October 2024. Reeves pledged that day-to-day spending must be paid out of taxes and can’t come from borrowing. The OBR forecast, revealed by Bloomberg, means the UK is on course for either higher taxes, spending cuts or both.
Last October’s Budget leftthe Chancellor with £9.9 billion of ‘headroom’, a buffer in case the cost of borrowing increased or GDP economic growth fell. Since the budget, UK economic growth has faltered and the UK government borrowing costs have soared in the gilts market, all but completely wiping out this buffer.
Two weeks ago, the BoE (Bank of England) halved their 2025 growth forecast from 1.5% to just 0.75%, warning that business and consumer confidence are on the slide with Governor Andrew Bailey warning “We now expect GDP growth to be notably weaker in the near term before picking up from the middle of the year”.
The Chancellor will conduct her first Spring Statement on 26 March.
Accountants KPMG and REC (Recruitment and Employment Confederation) reported that the volume of permanent vacancies in the UK dropped for the 15th month in a row in January and at the fastest pace since August 2020.
Rupert Soames, chairman of the CBI (Confederation of British Industry) warned the Chancellor that another raid on the private sector to fix the public finances would create more problems by further damaging business investment. In a speech last week, Mr Soames said “The Budget may have worked to fill a hole in the public finances by significantly increasing taxes on business, but in filling one hole it has created another – in the confidence and trust of business … this is not conducive for encouraging businesses to invest. Up and down the country businesses need to increase the rate of investment in growth, and they will only do that if they have confidence government policy will support them.”
The NAO (National Audit Office) reported the Uk’s “increasingly complex” tax system is costing businesses £15.4bn a year just to comply with the rules and regulations with at least £6.6bn per year spent on accountants, £4.3bn on internal administrative staff and £4.5bn on software and postage to satisfy increasingly difficult tax rules. The NAO said the £15.4bn figure was produced by HM Revenue & Customs and was likely to be an underestimate.
Deutsche Bank warned the UK is facing the prospect of 21% tariffs on goods exports to the US if President Trump imposes duties on the UK based on VAT charges resulting in a £24bn blow to the economy should the US forge ahead with “reciprocal tariffs”. NIESR (National Institute of Economic and Social Research) estimate that tariffs of this scale would knock 0.4% off UK GDP growth for the next two years amounting to a loss of £24bn.
USA
US consumer prices rose by 0.5% in January, resulting in a higher-than-expected annual rate of 3%.
US consumer sentiment fell to 67.8 in February, well below the expected figure of 71.3 while inflation expectations surged to 4.3%. These figures reinforce the Federal Reserve’s cautious stance on interest rate cuts.
US retail sales slumped in January by the most in nearly two years, indicating an abrupt pullback by consumers after a spending spree in the closing months of 2024. David Russell at TradeStation commented “The consumer sentiment report showed people were getting nervous and today’s weak retail sales number confirmed it. However, the resulting slack is good news for the Fed and tilts the balance a little bit more toward rate cuts.”
The EU
Next week’s German federal elections are more interesting than normal for three reasons:-
– A) There’s a chance the AfD (Alternative für Deutschland) joins the government for the first time since the end of the second world war
– B) Merz could remove the “debt brake”, the post-Global Financial Crisis measure that puts a constitutional bar on raising the deficit; and
– C) Germany as an arch-exporter stands to lose more than anyone from a global trade war.
Over the last four years, the Social Democrats, Greens and Free Democrats who together formed the unpopular “traffic-light” coalition have all seen their popularity sink drastically, while Christian Democrat
support has risen and the AfD’s has doubled. If the polls are right, the AfD are now the second-most popular party.
Others
The price of gold hit an all-time high of $2,963 an ounce last week. Its gained over 37% in the last 12 months.
India’s annualized headline inflation rate fell for the third month in a row in January to 4.31%. The slowdown suggests the RBI (Reserve Bank of India) will have room for manoeuvre to cut Indian interest rates further after cutting rates for the first time in nearly five years on 7 February.
The number of marriages in China plunged by a fifth to the lowest level on record in 2024, a setback to efforts by the government to reverse a demographic crisis in the world’s second-biggest economy.
Transparency International has released its 2024 Corruption Perceptions Index which gauges levels of perceived public sector corruption in 180 countries and territories around the world. The index scores countries on a scale of zero (highly corrupt) to 100 (very clean) with the average score just 43 out of 100. More than two thirds of countries (122) scored lower than 50 this year, as 148 countries have either stagnated or worsened since 2012. Just 32 countries have significantly reduced corruption during the same period. In 2024, the countries with the lowest perceived level of public sector corruption were Denmark (90), Finland (88) and Singapore (84), followed by New Zealand (83), Luxembourg, Norway and Switzerland (all at 81). At the opposite end of the scale, South Sudan scoring just 8 points, making it the world’s most corruption-stricken country, Somalia (9), Venezuela (10) and Syria (12) were only marginally better, as were Yemen, Libya, Eritrea and Equatorial Guinea (all on 13). The UK scored 71; Germany 75 and the US 65, its lowest score since 2012.
Stranger than fiction
Scientists have achieved two major advances in sustainable rice farming. An innovative cultivation method by Chilean researchers that cuts water use in half and a new strain from a Chinese Swedish team that reduces methane emissions by 70%. Currently, rice produces 12% of global methane emissions and uses around a third of the world’s freshwater resources.
The two most populous regions in the world, Central-South Asia and Eastern/Southeastern Asia have seen the proportion of children completing upper secondary school double since the beginning of this century. For the first time ever in human history, more than half of humanity has at least a high school education.
Quote
Albert Szent-Györgyi, a Hungarian biochemist who won the Nobel Prize in Physiology or Medicine in 1937, “Innovation is seeing what everybody has seen and thinking what nobody has thought”.
