23 February 2025
by Tony Redondo
David Smith in the Sunday Times says the economy is at risk of entering a “doom loop” where weak growth necessitates further tax hikes.
The UK economy is experiencing sluggish growth. The OBR (Office for Budget Responsibility) is forecasting a potential increase in the tax burden to 36.4% of GDP this year, the highest since 1950.
Currency Exchange Rates Update
The Pound Sterling continues to rise against its peers on strong wage and inflation data likely to entrench caution among BoE (Bank of England) policymakers trying to balance Britain’s sluggish growth and signs of job cuts against sticky price and wage pressures.
Against the euro, the pound has broken out of a narrow short-term trading range and may extend its gains given the political uncertainties facing Europe right now.
Against the Dollar, the Pound hit a 2-month high last week.
What’s in the news?
UK
Governor Andrew Bailey said the BoE is still on track to cut interest rates again this year despite surging pay growth and an anticipated increase in inflation.
The BoE cut interest rates for a third time earlier this month, bringing the Bank Rate down to 4.5%.
Good news
Consumer confidence rose in February. However, confidence remained down on last year.
Neil Bellamy, Consumer Insights Director at NIQ GfK, said “The biggest improvement is in how consumers see their personal finances for the coming year” adding that the BoE base rate cute will have “brightened the mood for some people.”
Consumer views on the general economic situation remained lower than 12 months ago suggesting that people “don’t expect the economy to show any dramatic signs of improvement soon,” he added.
Not so good news
A survey by the CIPD (Chartered Institute of Personnel and Development) indicates that a quarter of businesses plan to cut jobs, the highest level in a decade, excluding the pandemic. Retail and hospitality sectors are expected to be the hardest hit as the National Insurance rate rises from 13.8% to 15%.
The FSB (Federation of Small Businesses) Business confidence has plummeted to its lowest level since the pandemic.
The OBR (Office for Budget Responsibility) reported that the Treasury has borrowed £118.2 bn so far, this financial year, compared to OBR estimates that it would be £105.4 bn.
Analysis suggests the Treasury could lose up to £5.5 bn in corporation tax receipts because of major firms using compensation payments to people who were mis-sold loans to legally cut their corporate tax bills, reducing revenue for the Treasury at a time when the Chancellor is battling to meet her fiscal targets.
The Resolution Foundation reported that disability payments to Britain’s poorest households have rocketed amid a surge in mental health claims by families seeking to maximise their benefits. Its analysis of the poorest fifth of households shows their disability benefit income has more than quadrupled on average from £220 in 1995 to £1,070 in 2023.
Data from the DWP (Department for Work and Pensions) show that in January more than 900,000 people had been claiming UC (Universal Credit) with no work conditions for five years or more. Almost half of the UC claimants are under 40, suggesting an increasing number of people are headed for a life on benefits.
The TBI (Tony Blair Institute for Global Change) have warned that Energy Secretary’s Ed Miliband’s claim that net zero will create hundreds of thousands industrial jobs is vastly overstated. The think tank added that it was a “mistake” to let net zero dominate the Government’s entire economic strategy as it would deliver only a meagre boost to growth.
The BRC (British Retail Consortium) and Opinium report that expectations for the economy worsened for a fifth month running in February. The index of confidence stands at a record low.
The Business Secretary Jonathan Reynolds is under a fresh investigation after he was accused of lying about a previous job as a solicitor.
USA
The higher-than-expected US inflation data have made further interest rate cuts by the Fed much less likely. The US Dollar is now at its lowest level this year, down 3.4% since its January peak.
The EU
Germany goes to the polls on 23 February after 16 years of Angela Merkel followed by three and a half years of the unbeloved traffic light coalition of social democrats, the green party and liberal democrats.
Between 2013 and 2023, the German economy grew at an average pace of 1.1%, far below the US, which saw average real GDP growth of 5% during that period. Even worse, Germany’s economy contracted in 2023 and 2024, making it one of the few advanced economies to fall into the recession that many had predicted to follow Covid-19 and the ensuing inflation crisis.
As a result, many are suggesting these elections are the most consequential in a generation.
Germany’s Bundestag is the largest elected parliament in the world with 735 seats, but it’ll get significantly smaller after these elections due to a contentious overhaul of the voting system that some smaller parties complain will put them at a disadvantage.
Current Chancellor Olaf Scholz and conservative frontrunner Friedrich Merz effectively ruled out serving together in the same coalition, whatever the outcome of the ballot.
Polymarket report a 82% chance that AfD, a far-right party, securing 20% or more of the vote, which would be, by far, its best result to date.
Others
The RBA (Reserve Bank of Australia) cut the policy rate by 0.25% last week to 4.1%. However, Governor Bowman explicitly pushed back against market expectations of further cuts.
Australia goes to the polls in 3 months’ time with housing likely to play a dominant part in the election campaign. Housing in Australia is among the most expensive in the world, especially in Sydney where the average home costs almost 14 times annual disposable income.
Australia’s opposition Liberal-National Coalition leads the Labor government with an election in the latest sign of mounting dissatisfaction with Prime Minister Anthony Albanese’s administration. The centre-right opposition parties are currently ahead of Labor by 51% to 49% on a two-party preferred basis, according to a Newspoll survey published by The Australian newspaper today, with voter approval of Albanese falling to its lowest level yet of just 37%.
Stranger than fiction
Stilling is the scientific name for a drop in global wind speeds. According to research recently published by the University of Illinois, USA winds will drop by 5% in the next 25 years. That will make an appreciable difference to the output from renewable energy projections.
Quote
Joseph Stalin, “The people who cast the votes don’t decide an election, the people who count the votes do.”
