04 January 2025
by Tony Redondo
Happy New Year everyone.
As this is my first blog of the year, I am determined to start on a positive note so here are several reasons to be cheerful about 2025: –
– The Pound Sterling was 2024’s Second-best Performing G10 Currency.
– Bank of England Governor Andrew Bailey hinted at possible rate cuts in 2025, with markets pricing in three cuts. Lower rates may not do the Pound Sterling any favours, but they could rescue the UK economy by stimulating economic activity.
– The number of mortgage approvals has increased ahead of the stamp duty increases due from April onwards. This could boost consumer confidence and spending in the first quarter of 2025. – With expected interest rate cuts in the US and ongoing wealth transfers, there may be favourable conditions for currency exchange rates as global liquidity increases.
Currency Exchange Rates Update
The Pound Sterling may have ranked only behind the mighty US Dollar in the currency markets of 2024 but has got off to a poor start in 2025.
Jeremy Stretch, an analyst at CIBC Capital Markets says “Sterling has started the year on the defensive. The UK’s growth outlook has shifted from among the best in the G10 in H1 2024, to among the weakest in H2 2024.”
Economists have warned that Chancellor Rachel Reeves might have to raise taxes at the spring spending review as a recent rise in the cost of financing UK debt means she is on course to miss her fiscal rules.
Andrew Goodwin, Chief UK Economist at Oxford Economics says “The UK’s debt dynamics are among the worst of the advanced economies, and higher market interest rates have already eaten some of the headroom against the fiscal rules. The Chancellor will come under pressure to implement further tax hikes”.
The US dollar enjoyed its best year since 2015 in 2024 as US economic strength reins in expectations for the Federal Reserve’s rate-cutting cycle and Trump’s threatened tariff increases underpin bullish bets on the currency. The US Federal Reserve cut interest rates in December but indicated it would likely only cut rates on two more occasions in 2025. This puts the Fed firmly in the slow lane regarding rate cuts, which should further bolster the Dollar as does rising oil and gas prices.
The markets are currently pricing in four 0.25% rate cuts in the EU this year taking the ECB’s benchmark rate down from 3% to 2% with some analysts predicting that rates may go as low as 1.5%. This together with the political instability in the EU, especially to its two biggest economies, Germany and France should keep the Euro under pressure throughout the year.
What’s in the news?
Total global exports in 2024 was $23.8 trillion with the top 30 exporting countries accounting for 80% of this total. China leads with$3.38 trillion followed by the USA with $2.2 trillion, then Germany with $1.69 trillion. France is at $648 billion. The UK is at $521 billion, almost the same as Belgium.
UK
Like in 2024, the big focus in the UK for 2025 will be the pace at which the BoE (Bank of England) cuts interest rates in 2025.
The BoE cut UK interest rates just twice in 2024 with the Bank Rate standing at 4.75%. After the December data, financial markets expect a similarly gradual pace of easing in 2025.
Guillaume Derrien, senior eurozone economist at BNP Paribas says “Although the UK economy is facing significant wage pressures, economic activity is significantly less dynamic than in the US. The BoE may be forced to prioritise growth in 2025. Between an ECB whose rate cuts will, admittedly, be gradual but steady, and a US Federal Reserve that is now more hawkish, the Bank of England will be in an intermediate position in 2025.”
Tim Sarson, head of tax at KPMG, says many of his multinational clients are “cross” about the National Insurance increase that he said came as a “shock” to the big employers he works with, and many believe Reeves is far from done with her tax raids saying “There’s an assumption among a lot of them that she’ll be back for more. You only need to look at history where generally a new government often comes back a couple of times [to raise taxes] early on in the parliament. And then of course they do giveaways later on. Unfortunately, I think the vibes about growth are ‘wait and see’. And ‘wait and see’ is quite a dangerous vibe, because if everyone’s waiting and seeing, then that means that everyone’s holding off on pressing the button on investment and spending.”
Not so good news
In a further blow to Labour’s growth ambitions, the ONS (Office for National Statistics) revised down the UK economic growth rate for the second and third quarters of 2024 in the run-up to the Budget. As a result, the UK tied with Italy for the lowest growth in the G7 during the third quarter of 2024.
The CBI (Confederation of British Industry) are predicting a sharp fall in business activity in 2025 with growth expectations falling to their weakest since November 2022, in the aftermath of Liz Truss’ Mini Budget.
According to the latest Lloyds Business Barometer Business confidence fell to its lowest level in 2024 during December, as fears around layoffs and price increases hurt business growth.
The country’s biggest recruiters, ManpowerGroup have warned that Reeves’s record tax raid has brought hiring to a standstill with no respite in sight.
Activity in the UK’s manufacturing sector fell to its lowest level in nearly a year as businesses brace for the impact of the government’s first Budget. According to S&P’s manufacturing PMI (Purchasing Managers’ Index), factory output, new orders and employment, all fell at accelerated rates in December. The survey suggested that the downturn was “widespread” across different sectors and particularly acute among small and medium sized business. It also showed that business confidence among manufacturers hit a two-year low, partly due to the tax rises on businesses announced in October’s Budget.
The IOD (Institute of Directors) economic confidence index, which measures business sentiment about the economy is at its fourth lowest reading since the measure’s introduction in July 2016.
Anna Leach, chief economist at the IoD said “IoD members remained cautious on the outlook for the year ahead when we surveyed them over the festive period. The government must move swiftly to deliver a policy environment in the UK that strengthens investment, with Industrial Strategy, 10-year infrastructure plans and planning reform presenting material opportunities”.
The deVere Group, an independent financial advisory and asset management organisation survey found that 42% of those with financial assets in or ties to the UK are actively now seeking to transfer their wealth out of UK and opting for “more tax-friendly” jurisdictions like Italy, Switzerland, Dubai, Portugal and Malaysia.
The deVere report suggests there has been a “seismic shift” in attitudes toward the UK’s financial environment with families, business owners and investors with UK financial connections exploring all options to “mitigate the impact of the new tax landscape”.
Investment group AJ Bell report that UK households are wary that the government might hike taxes again in 2025. 83% of the customers surveyed by the retail investment platform said they were either very concerned or somewhat concerned about further tax increases in 2025.
A green levy meant to help the Government meet its net-zero targets will result in household shopping bills rising by up to £1.4 billion a year.
Data published by Altus Group and the CRR (Centre for Retail Research) found a total of 169,395 retail jobs have been lost in 2024, soaring by almost 42% compared with 2023, the highest level since the depths of the first Covid lockdown as shopkeepers battle rising taxes and a slowdown in spending.
USA
The US economy defied expectations in 2024, outperforming G7 peers despite the divisive election, elevated interest rates and a cooling labor market.
Maersk, the world’s No. 2 container carrier has warned its clients of a renewed threat of a dockworker strike paralyzing a chunk of America’s seaborne shipping and urged its customers to remove cargo from US ports along the East and Gulf coasts before a 15 January deadline.
The S&P 500 index has risen more than 20% for the second year in a row, as investor excitement about artificial intelligence fuels strong gains in mega-cap technology stocks.
Homelessness in the US has soared to its highest level since the federal government began keeping track nearly 20 years ago, driven by high rents and a lack of affordable options but also a crush of migrants claiming asylum at the US border with Mexico.
The EU
Economists have warned the EU to ‘get its house in order’ or face ongoing decline as Germany and France undergo political and economic turbulence that stranded the region’s two largest economies without a budget in place for 2025. Economists say the trajectory for both countries is worrying, warning that the absence of growth, fiscal imbalances and political intransigence could lead to decline and a loss of standing for Europe as a whole.
The Ukraine halted the flow of Russian gas to several European countries on New Year’s Day, bringing an end to Moscow’s decades long dominance over Europe’s energy markets.
Others
More than 50 members of Justin Trudeau’s Liberal Party have come to a “consensus” that he must step down as prime minister. Trudeau’s government, which lacks a majority and relies on other parties to pass legislation, has been in turmoil since Finance Minister Chrystia Freeland resigned, saying she and the premier were at odds over policy.
The International Energy Agency’s annual report showed that demand for coal set a record high in 2024.
Gold prices hit a new all-time high in December. Gold prices have risen by nearly 28% in 2024, as investors retreat back to the traditional safe haven amid an uncertain geopolitical and economic climate.
Stranger than fiction
The UK Met Office claims to have a continuous record of temperatures at Stornoway Airport going back to 1873. This is truly remarkable since manned powered flight was not achieved until 1903 and the actual airport was built in 1937.
A cynic could suggest that the latest in a long line of reporting errors by the Met Office may not be so innocent and instead is yet another sign that in its mission to scare the population into accepting the looming Net Zero catastrophe.
Quote
Mahatma Gandhi” Strength does not come from physical capacity. It comes from an indomitable will.”
