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Kakistocracy

21 December 2024 

by Tony Redondo 

For this last Gravitational Pull blog of the year, I thank the Economist magazine for their word of the year for  2024, Kakistocracy. 

A kakistocracy is a government run by the worst, least qualified, or most unscrupulous citizens.  The word was coined as early as the seventeenth century. 

Currency Exchange Rates Update 

The Pound Sterling hit its highest level against the Euro since March 2022. Then came the dovish BoE (Bank of  England) interest rate decision and the Pound gave up over 0.9% of its value. It remains at the top end of its  trading range of the last 33-months. 

2024 has been marked by the strength of the dollar, which is headed for its biggest annual rally since 2015 and  last week hit its highest level against the Pound since May. Against the Euro, the Dollar hit its highest level  since November 2022. 

The Pound hit its highest level against the Australian Dollar since April 2020; a 9-year high against the New  Zealand Dollar and its highest level against the Canadian Dollar since March 2019. 

What’s in the news? 

The BoE held interest rates at 4.75% and downgraded its economic forecasts for the UK towards stagnant  growth. Only six members of the Bank’s Monetary Policy Committee voted to keep interest rates steady, less  than had been expected, with three voting to cut rates by 0.25% citing fears over a weaker economy. 

The BoE slashed UK growth forecasts for the last quarter of 2024 to zero, down from its estimate last month of  a 0.3% rise. GDP fell by 0.1% in both September and October.

The BoE statement included “The prospective increase in labour costs from higher National Insurance  contributions from next April, announced in the Budget, is currently weighing heavily on sentiment. Companies are considering cutting their headcount, accelerating investment in automation, and offshoring  labour to deal with the National Insurance hike.” 

Inflation continues to be a headache for the BoE; hence the rate hold but the BoE may end up being forced to  make more cuts than it would like in 2025 to salvage the UK economy. 

The money markets are now pricing in over a 50% chance of a cut at the next BoE meeting due on 6 February. UK 

YouGov’s latest approval rating survey shows 59% of the public now disapprove of Labour’s record and only  18% of people approve. 

The data was gathered between 7 and 9 December, just after Keir Starmer’s “Plan for Change” speech and  Starmer is more unpopular after five months in Downing Street than any other Prime Minister since polling on  the question began in the late 1970s.  

Despite the polls, Starmer says he has “No regrets about the decisions I’ve made”. The PM made the  comments as he answered questions from the liaison committee of senior MPs from all parties for the first  time.  

Good news 

UK retail sales rose slightly in November amid concern over the ‘golden quarter’. 

The latest ONS (Office for National Statistics) data shows retail sales up 0.2% last month, following a 0.7% fall  in October. 

The rise was much smaller than economists had expected and comes amid concern over a tougher than usual  “golden quarter” leading up to Christmas, following the wide-ranging tax hikes announced in Rachel Reeves’  Autumn Budget. 

The ONS also reported that government borrowing dropped to its lowest November in three years as higher  tax receipts and lower debt interest gave the government a much-needed boost. 

Dennis Tatarkov, senior economist at KPMG UK commented “Lower interest costs provided a temporary  respite on public sector borrowing. However, this trend is unlikely to last as actual and projected inflation has  moved up in recent months, which would push up interest costs going forward. Interest payable on index linked gilts follows changes in the retail price index, which adds a significant level of volatility to the overall  interest costs on central government debt.” 

Despite the good news for the government, public sector net debt excluding public sector banks now sits at  98.1% of GDP, 1.2% higher than last year and still close to the highest since the early 1960s. 

A study from the Centre for Economic Performance, linked to the LSE (London School of Economics) has  found that the negative impact Brexit had on UK trade may have been softened by big firms adapting to EU  barriers.

Not so good news  

The ONS (Office for National Statistics) reported that 52.6% of households in the UK receive more in benefits  than they contribute to taxes. 

UK inflation spiked to 2.6% in November, up from 2.3% in October. Inflation is expected to rise further in 2025. 

UK PMI was flat last month with some areas of the economy seeing a sharp downturn. The private sector cut  jobs at the fastest rate for nearly 4 years in December as firms respond to new tax rules announced in the  Budget. 

The latest S&P Global Flash UK Purchasing Managers’ Index (PMI) found manufacturing output and PMI both  fell to an 11-month low while companies reported the sharpest decline in workforce numbers since January  2021. 

Chris Williamson, chief business economist at S&P Global Market Intelligence said “Businesses are reporting  a triple whammy of gloomy news as 2024 comes to a close, with economic growth stalled, employment  slumping and inflation back on the rise. Economic growth momentum has been lost since the robust  expansion seen earlier in the year, as businesses and households have responded negatively to the new  Labour government’s downbeat rhetoric and policies. Business confidence has sunk to a two-year low as  companies weigh up a tougher outlook for sales alongside rising costs, notably for staff as a result of changes  announced in the Budget. The survey’s price gauges are indicating that inflation is turning higher again.” 

The IFS (Institute for Fiscal Studies) said Rachel Reeves may be forced to announce emergency tax rises in the  spring if the economy continues to deteriorate, warning that a “quirk” in Ms Reeves’s new tax and spending  rules meant she might be required to announce measures to balance the books in March.  

According to analysis by CBI Economics, Reeves’s inheritance tax raid to cost more than it makes. 

Standing charges on business electricity bills have risen sixfold since 2018 and are set to climb further in the  next five years according to the consultancy Cornwall Insight. 

In another major U-turn, the Starmer government has ruled out compensation for almost four million women  who claim they lost thousands of pounds because of changes to the state pension age after promising to right  historic wrongs before July’s general election. 

City Minister Tulip Siddiq, whose ministerial remit includes tackling corruption in financial markets, is accused  of having helped broker a deal with Russia for a nuclear power plant in Bangladesh 11 years ago which  allegedly saw £1bn siphoned off. The City minister has been named in an investigation into whether her  Bangladeshi family embezzled nearly £4bn from energy and major infrastructure deals. 

USA 

The Fed announced their widely telegraphed 0.25% interest rate cut amongst guidance strongly suggested  that there might not be too many more cuts to come in 2025. 

US retail sales increased more than expected in November.

The EU 

Credit rating agency Moody’s cut France’s credit rating from ‘Aa2’ to “Aa3” with a stable outlook citing  concerns over “political fragmentation.” 

There are also political concerns next door in Germany with snap elections called for 23 February. 

The elections come against a backdrop of a deteriorating economy. The Bundesbank (German central Bank) now predicts that output will shrink by 0.2% over 2024, making Germany by far the worst performer in the G7. It now estimates that GDP will expand by only 0.2% over 2025, after cutting its earlier forecast of 1.1% growth. 

For what until recently was regarded as one of the most competitive economies in the world the outlook is  dire. Factories are closing on an almost weekly basis, including at iconic companies such as Volkswagen,  which had never closed a plant before, amid a collapse in business confidence. The reliance on cheap Russian  gas turned out to be a catastrophic mistake when Vladimir Putin invaded Ukraine, and the former chancellor  Angela Merkel’s rash decision to close Germany’s nuclear power plants only compounded the error. Germany  now has some of the highest power prices in the world, crippling heavy industries such as chemicals that are  crucial to the industrial base.  

Its huge exports to China worked a treat with a booming China but are now a liability as China slows down and  trade barriers go up. 

Then there’s Donald Trump who will almost certainly impose steep tariffs on the whole of Europe, with  Germany’s €63bn surplus with the US a specific target.  

Others 

New Zealand’s economy suffered a deeper-than-expected recession in the second and third quarters, with  data coming in much worse than any forecasters expected.  

China continues to spiral into deflation. Prices in the world’s second-biggest economy have fallen for six  consecutive quarters, and if they fall for one more, the run will equal a record deflationary streak set in the  Asian Financial Crisis of the late 1990s.  

November’s retail sales in China were much weaker than expected. 

Justin Trudeau is under mounting pressure, including from his own MPs to step down as Canada’s prime  minister before the end of the year. Members of his Liberal Party called on the embattled premier to consider  his future at a meeting last week after the shock resignation of Chrystia Freeland, the former deputy prime  minister and long-time ally, who cited Donald Trump’s looming tariffs among her reasons for quitting. Dominic  LeBlanc was sworn in as her replacement. Opinion polls suggest Mr Trudeau’s Liberal party would face a  devastating loss to his Conservative rivals if a general election was held today. Canada’s next federal election  must be held before 20 October 2025. 

Brazil took extraordinary measures last week to stem a collapse in its currency that’s quickened in recent  weeks amid investor fear of soaring budget deficits with the real down more than 20% this year to a record low,  the most among major currencies and at an all-time low against the US Dollar. 

Iran faces dual crisis amid a currency drop and the loss of Syrian President Bashar al-Assad, its major regional  ally. Iran’s currency, the rial, hit a record low of 756,000 to the dollar.

Quote 

Winston Churchill “Success is not final; failure is not fatal. It is the courage to continue that counts.” 

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