18 January 2025
by Tony Redondo
This Monday is a US national holiday (Martin Luther King Day) and the inauguration in Washington DC of Donald Trump as the 47th POTUS (President of the United States).
Currency Exchange Rates Update
The Pound Sterling was the best performing G10 currency in the first half of 2024 and finished the year in second place, just behind the US Dollar.
The Pound has started 2025 as the worst performing G10 currency with standout losses against the Euro of over 2% and over 3% against the US Dollar to date.
The Pound’s predicament could worsen before it gets better given the negative structural challenges it faces in UK fiscal sustainability terms and ongoing stagflation fears.
The eurozone is in no better place with stagnation fears of its own and ongoing political turmoil in both Germany and France.
In contrast, US exceptionalism will persist. Macquarie, the Australian investment bank point out that the US Dollar accounts for 73% of global non-resident financing (US$13 trillion), around 48% of SWIFT transactions, 88% of all foreign exchange volume and nearly 58% of global reserves. Despite all the rhetoric about the rise of China, the renminbi accounts for only 4% of SWIFT, less than 10% of FX transactions, and about 2% of global reserves.
What’s in the news?
UK
Economists expect the BoE (Bank of England) to cut UK interest rates when they next meet on 6 February after this week’s very poor economic growth data and slightly weaker than expected UK inflation data.
UK GDP grew by just 0.1% in December following two consecutive months of contraction. The UK has barely recorded any growth since March. Retail sales volumes fell 0.3% month-on-month in December and was revised down in November by the ONS (Office for National Statistics).
Jamie Constable, chief market strategist at Singer Capital Markets said ‘The UK economy is flat as a pancake and needs some incentives added to the ingredients. A rate cut on 6th February should now be a certainty”.
With global interest rates on the rise and the UK amid a debt crunch, investors worry that the British Government is more exposed than most to higher borrowing costs. Yields on UK 10-year Gilts (bonds) have climbed to highs not seen since 2008. The yield on UK 30-year Gilts are at levels last seen in 1998.
GS (Goldman Sachs) estimate this risks adding £12bn to the Treasury’s annual debt interest payments in 2029, the target year for Rachel Reeves’s borrowing rules. The Chancellor left herself £9.9bn of wriggle room against her self-imposed targets in her 30 October budget last year so on the current trajectory, she is poised to break her own rules.
The latest survey by Find Out Now puts both Reform UK and the Conservative Party on 25% each with Labour down to 24%.
This week sees the latest UK employment and wages data out on Tuesday and the December PMI figures out on Friday.
Good news
The ONS reported the UK CPI (Consumer Prices Index) unexpectedly fell to 2.5% in December following two consecutive monthly rises.
Chancellor Rachel Reeves sought to allay market concerns over the UK’s fiscal position during a trip to China, where she obtained deals worth £600 million to the British economy over the next five years.
HSBC Innovation Banking UK and Dealroom reported that the UK tech sector is now worth £1 trillion, a 20% jump since 2023 and a nine-times increase in the last decade. Startups with a UK Headquarters now employ over 1.8m people, double the level of 2020. The UK remains Europe’s leading ecosystem and is the third largest in the world, behind the US and China. The UK tech sector is worth more than the French and German ecosystems combined.
Not so good news
Stagflation fears continue to mount in the UK, with inflation, especially in the dominant services sector proving sticky at the same time as the economy weakens.
The Boston Consulting Group estimate Donald Trump’s tariffs threaten to cost British industry $3bn per year with cars, aerospace, pharmaceuticals and machinery among the sectors set to be hit hardest by the proposed 20% tax on goods imported into the US.
Recruiter Morgan McKinley report that the number of financial services vacancies fell to its lowest level since 2020 in the final three months of 2024 and City openings are now at their lowest level since the Covid pandemic shut down the economy.
A separate survey of CFOs (Chief Financial Officers) by Accountants, Deloitte found business confidence had plunged to its lowest levels since early 2023.
Rupert Soames, chair of the CBI (Confederation of British Industry) said the Chancellor had “bruised” British companies after rolling out some £40bn worth of tax hikes in her Budget last October. Soames told BBC Radio 4’s Today programme “The Chancellor told us at the time of the budget that there was an unexpected hole of about £22bn in the Government finances, and business was going to have to fill it. In filling in one hole, it’s created another, and that hole is a hole in the confidence and trust that business has in the Government. I think sometimes it’s not understood, the extent of the impact, particularly on companies that employ lots of people. We think the national insurance increases are going to feed through into inflation, we’re going to have a lower growth rate, but also, because of things like the Employment Rights Bill coming along, you’re going to find people laying people off and less likely to employ”.
The BCC (British Chamber of Commerce) reported that 24% of firms increased staffing numbers in the three months to December, down from 27% in the third quarter of 2024. Jane Gratton, deputy director of public policy at the BCC, warned that the “concerning results” from the survey are likely to represent “just the tip of the iceberg”.
A separate survey from NatWest showed that businesses in London were cutting jobs at the fastest pace since October 2023.
The BoE has warned that billions of pounds in UK pension pots are at risk as its growing concerned about an increase in the growing use of a type of insurance known as funded reinsurance. The BoE said there is a risk with this type of funding and that UK savers may be inadvertently exposed to risks because of its complexity. Funding reinsurance is used by insurers to make sure they can pay out the pensions of the pension schemes they buy. It is provided by third parties, and can be from private equity firms, and other insurance or reinsurance companies. In November 2023 the PRA, the Bank of England’s regulatory arm, said insurers were “increasingly making use of cross-border funded reinsurance arrangements” and as these funds are coming from abroad and from companies whose origin was not always clear and “who may be more exposed to a range of illiquid investments.”
USA
In the four years Joe Biden has been in office, the 100 wealthiest Americans got more than $1.5 trillion richer. Biden ran for office promising to boost taxes on the wealthy and close loopholes.
Another blockbuster US jobs report showed 256,000 new jobs created in December plus a decline of the unemployment rate to 4.1%. This is a strong signal to the Federal Reserve that no interest rate cuts should be in the pipeline in the first half of 2025.
US inflation rose to 2.9% in December, in line with expectations, further bolstering the case for the Fed to slow its pace of interest rate cuts this year.
The Small Business Optimism Index rose for the fourth consecutive month in December, reaching its highest level since October 2018. Notably, about half of surveyed business owners expect economic conditions to improve, the highest share since 1983.
Ahead of his inauguration on Monday, Trump told US ownership of Greenland, the autonomous Danish territory and the world’s largest island is an “absolute necessity” for purposes related to “national security and freedom throughout the world.”
Jakob Kløve Keiding, senior consultant at the Geological Survey of Denmark and Greenland, told CNBC “Overall, we can say that there is a huge potential for critical raw materials”. Meanwhile, Greenland’s prime minister said he will seek a closer relationship with the US, highlighting the Arctic island’s push for independence amid renewed interest from Trump.
The EU
The risk of stagflation continues to stalk the eurozone. Recent data shows the region’s inflation moved up in December at a time when its growth outlook is bleak. Political uncertainty within Europe adds to the euro’s challenges as well.
Campaigning has got underway for Germany’s 23 February election with Friedrich Merz, the conservative Christian Democratic-led bloc leader leading in the polls with the AfD polling in second place. The AfD have confirmed Alice Weidel as its first-ever candidate to be chancellor.
The German economy contracted by 0.2% in 2024, its second consecutive annual slowdown.
Spanish PM Pedro Sanchez announced plans to impose a 100% tax on new non-EU buyers buying Spanish property to the delight of property developers throughout Portugal, Italy, Croatia and Greece amongst others. It is one of a dozen planned measures announced by the socialist prime minister aimed at improving housing affordability in the country and said these proposals would be finalised “after careful study”. Data from Spain’s Association of Registrars shows that in the third quarter of 2024, non-Spaniards including EU citizens bought 24,700 properties in Spain, accounting for 15% of all real estate purchases. The largest group of non-Spanish buyers were those from the UK, who made up 8.5% of buyers. However, the chances of the proposal becoming law are limited because Sanchez heads up a minority government. In another sign that non-EU buyers are no longer welcome, the Spanish government is shutting the golden visa scheme in April. Another huge problem in the Spanish property market is the new rental laws protecting the tenant have meant that landlords have withdrawn hundreds of houses from the market because it’s practically impossible to evict a tenant who doesn’t pay their rent.
Others
China’s economy expanded by 5.4% in the fourth quarter of 2024, exceeding analysts’ expectations. This last quarter sprint helped lift China’s full-year GDP growth to 5% in 2024, in line with the official government target of “around 5%.”
China’s trade surplus soared to a record $992 billion last year as exporters rushed to make up for sluggish demand at home and get ahead of Trump’s return to the White House.
India reduced its rural poverty rate from 25.7% in 2011-12 to 4.86% by March 2024, driven by government support initiatives. India’s inflation slows to a lower-than-expected 5.22% in December, boosting hopes for further interest rate cuts in 2025.
According to Polymarket, there is a 90% chance that Pierre Poilievre, leader of the Conservative Party of Canada, will be the prime minister of Canada after its federal election.
Stranger than fiction
PM Starmer’s commitment to creating AI datacentres resulting in a 20-fold increase in AI computing power in the next 5 years is ambitious but on a collision course with another of his policy commitments of the UK being 95% carbon free with its energy consumption by 2030.
The 95% carbon-free commitment alone will require a doubling of the UK’s onshore wind, a tripling of its solar power and a quadrupling of its offshore wind capacities and those AI datacentres are going to require colossal amounts of electricity. According to the IEA (International Energy Agency), the increase in demand from AI in the next 2 years alone will be the equivalent of the total electricity consumption of Japan.
Labour’ Energy Minster Ed Miliband got his boiler tax through Parliament with minimal scrutiny last week despite warnings the move will push up prices. Under the scheme, which comes into force in April, boiler manufacturers will be fined if they fail to sell enough heat pumps, which companies have warned will force them to increase the price of installing a new gas boiler by as much as £120. Miliband has admitted that heat pumps may never be cheaper than gas boilers. Heat pumps currently cost around £10,000 if bought without any Government subsidy, compared to around £3,000 for a gas boiler. The relatively high price of electricity also means they are often more expensive to run than a gas boiler, despite being more efficient.
Quote
Martin Luther King, Jr. “In the end, we will remember not the words of our enemies, but the silence of our friends.”
