27 February 2025: Reeves believes that trade with the U.S. can flourish

Before the Prime Minster left for Washington yesterday, he participated in a heated discussion with Opposition Leader, Kemi Badenoch, about his plans to increase defence spending to 2.5% of GDP by 2027.

Badenoch pushed Starmer for more details of where the extra money will be spent since it seems that the cuts in the overseas aid budget will simply assist another overseas nation, Ukraine. When she was in government, the Conservative leader resisted calls for the aid budget to be cut, with Starmer telling her yesterday that she was “desperate for relevance.”

Starmer, who will meet U.S. President Trump later today, believes that Ukrainian President Zelenskyy should have a seat at the table when peace negotiations begin in earnest, The settlement of the conflict has taken on far greater significance since it became clear that Trump wants access to rare earths which are found in abundance in the war-torn country.

On Tuesday, the Prime Minister announced that the UK would raise its defence spending to 2.5% of gross domestic product in 2027 and set a target for defence spending to reach 3% in the next Parliament.

Both the earlier Conservative government and the current administration had earlier committed to raising defence spending to 2.5% without setting a time frame.

The Prime Minister said the government would “fully fund our increased investment in defence” by reducing aid spending from 0.5% of gross national income to 0.3% in 2027.

The Bank of England's response to higher U.S. tariffs and other trade restrictions will depend on the extent to which they disrupt supply chains rather than just push up costs, BoE policymaker Swati Dhingra said on Tuesday.

Fresh from her reappointment as an independent member of the Bank of England’s rate-setting Monetary Policy Committee, Dhingra went on to say that in the short term, the inflationary impact of higher tariffs was likely to be offset by weaker global growth.

"If the world economy fragments in an orderly way, monetary policy would likely not need to respond while the world economy transitions and prices re-adjust to reflect the new geopolitical developments," she said.

However, if tariffs evolved into a system that placed strict barriers on the foreign content of imported goods, that could lead to a disorderly break-up of supply chains.

"In an extreme scenario, several large economies deciding to impose trade barriers similar to those proposed by the U.S. would put severe strain on a few sources of supply," she said in a speech delivered to Britain's National Institute of Economic and Social Research.

Dhingra likened the effect of tariffs to the initial effect of the Russian invasion of Ukraine. The global economy is broken down into suppliers and consumers, and it is when suppliers’ supply chains break down that issues, including inflation, ensue.

The pound has experienced a fairly mixed week in which it has struggled for direction. Yesterday, it rallied to a high of 1.2715, its highest since December 12, but fell back to close at 1.2674.

Relying on anecdotal evidence, fears are growing that the U.S. economy is beginning to lose momentum. Comments for new Treasury Secretary, Scott Bessent, have proven to be part of the catalyst for concern.

Bessent said earlier in the week that he believes that fractures are beginning to appear while the economy looks robust “on the surface” underneath.

Staying faithful to his President and Government Efficiency Secretary's recent comments, he believes that the size of the public sector has led to inefficiencies that must be addressed.

Casting his net wider, he also commented that China needs to boost domestic consumption and cannot continue to rely on manufacturing and exports for growth.

"We have to push back and tell them that they cannot export their deflation to the rest of the world," Bessent told an event at the Australian embassy in Washington.

He said that a U.S.-Ukraine deal featuring “strategic minerals, energy and state-owned enterprises” has an “implicit” economic security guarantee. This deal is part of President Trump’s long-term negotiating strategy for peace between Ukraine and Russia, and letting the Ukrainians get back to a peaceful existence,”

Richmond Federal Reserve President Tom Barkin said he will follow a wait-and-see approach on Central Bank interest rate policy until it is clear inflation is returning to the Fed's 2% target.

Current uncertainty, whether driven by trade and other policy changes coming from the Trump administration and other factors, "argues for caution as we look to wrap up the inflation fight," Barkin said in remarks prepared for delivery to the Rotary Club of Richmond.

"It’s hard to make significant monetary policy changes amid such uncertainty," Barkin said. "So, I prefer to wait and see how this uncertainty plays out and how the economy responds."

Rates should "stay modestly restrictive until we are more confident inflation is returning to our 2% target."

The Fed is expected to keep its benchmark interest rate steady in a range of from 4.25% to 4.50% at its March meeting, extending a pause to rate cuts after rates fell by 100 basis points in 2024.

The President of the Dallas Fed, Lorie Logan, speaking in London this week, believes that the Central Bank should encourage banks needing liquidity to be ready to borrow from the Fed and “improve the efficiency and effectiveness of policy implementation” she commented.

If the Fed held a daily lending auction, the depository institutions most in need of reserves on any given day would likely place the highest bids, automatically redistributing liquidity away from firms with less need."

The Fed uses its so-called discount window facility to lend to banks that need ready cash, often in exchange for less-than-liquid collateral such as business loans.

The market is “gearing up for the publication of the latest data for Personal Consumption Expenditures, which is due for release tomorrow. Over the past few days, expectations have risen that the numbers will be more in line with the CPI data which was published earlier in the month and led to the current expectation that interest rates will remain on hold.

The dollar index moved away from its short-term support level yesterday, rising to a high of 106.61 and closing at 106.51.

Last weekend’s Federal Election in Germany has done nothing to ease concerns regarding the state of the economy. The post-war regulations that have seen every German election since 1945 see power roughly divided between middle-of-the-road parties while ensuring that extreme right (or left) wing parties never seize power again, yet do nothing for the economic landscape.

The Centre-right CDU-led group that won on Sunday has a few different ideas from the Centre-left coalition led by Olaf Scholz, which was defeated.

Radical change is needed to steer the economy away from energy-hungry heavy industry, in which it cannot compete on the world stage any longer.

It’s “five minutes to midnight” for Germany’s status as a global economic force, the head of the Bundesbank has warned after overseeing the Central Bank’s first annual loss in 45 years. Germany’s economy has been rocked from all sides in the last couple of years, challenging the fundamental viability of its economic model.

The Russian invasion of Ukraine three years ago continues to place pressure on energy prices while fresh competition from China, in addition to falling demand in its key export markets, including China, has added pressure on manufacturers.

Fresh tariff threats from the Donald Trump administration have created the latest risk for Germany’s export-heavy economy.

German GDP contracted by 0.2% last year, adding to a 0.3% decline in 2023. Several economists expect a third straight year of contraction this year, with state-owned bank KfW forecasting a 0.2% decline this year.

Since energy is central to the country’s economic woes, it is inconceivable that the Governments of Scholz and now Merz have not placed energy security front and centre of their economic policies.

The continued rise of the “Club Med” economies has seen the Greek tourism industry hit new highs. Data for visitors to the country reached 35.9 million in 2024, generating almost Eur 22 billion in revenue.

Meanwhile, the French economy continues to slide deeper into recession. Ironing out the 2026 budget of the Eurozone’s second-largest economy will prove a “demanding” task, French Economy Minister Eric Lombard told CNBC.

2026 will have a very demanding budget because the country will continue to diminish its budget deficit to below 5.4%, possibly below 5%,” the economy minister told CNBC this week, noting that the final target hadn’t been set in stone.

France’s inability to agree on a budget for 2025 and broader instability in French politics have bled into markets over recent months. Lombard conceded a there has been a negative impact on growth while expressing hope that investors will now return to France.

The Euro returned to the centre of its recent range yesterday as it fell to a low of 1.0475 and closed at 1.0486.

Have a great day!