5 March 2025: Reeves will target defence spending towards “left behind towns”

Chancellor Rachel Reeves is looking for a positive aspect in the ramping up defence spending. She said yesterday that she would be trying to create jobs in the UK’s more deprived areas by encouraging businesses that win contracts to invest in new facilities in areas that were once thriving but have recently become economically unviable.

Announced by Keir Starmer last week amid growing fears over Donald Trump’s commitment to European security, the government will increase defence spending to 2.5% of GDP by 2027, worth an added £6bn a year.

With European leaders scrambling to strengthen their military capabilities, the chancellor said the spending would also benefit jobs and growth in Britain as the state looked to spend more money with UK-based defence companies.

“I do want to make sure as we spend more on defence, that it is used to support British jobs and British industries. That’s why I met on Friday with UK defence companies and companies operating in the UK to work on how we can increase the capacity and the capability,” she said.

“I am determined that as we spend that money on that defence and security, that we use it in a way that can also help stimulate the economy, and particularly to revive some parts of the country that do often feel like they’re left behind.”

Speaking at a conference in London yesterday held by the manufacturing trade body Make UK, Reeves ducked questions from the media about whether Britain could still trust the US as a military partner under Trump’s administration.

The UK’s nuclear weaponry relies heavily on cooperation with the US, as does an array of other British military hardware, including F-35 fighter jets and Apache attack helicopters.

This marked something of a comeback from Reeves. Announcing plans that manufacturers could “get behind” as she tries to leave behind the rancour that she has suffered in her first six months in office.

She went on to warn that Donald Trump’s swingeing tariffs will harm the UK economy, even if Britain is exempt.

She believes a global trade war triggered by the US President would lead to even higher inflation and slower economic growth.

I don’t want to see tariffs increased,” Reeves said at the event hosted by the lobby group which supports UK manufacturing. “Even if tariffs are not applied to the UK, we will be affected by slowing global trade, by a slower GDP growth and by higher inflation than would otherwise be the case.”

Trump's announcement yesterday that he would be forging ahead with tariffs on goods imported from China, Mexico and Canada saw markets react turbulently.

The pound rallied to its highest level since last August yesterday, reaching a high of 1.2799 and closing at 1.2784 as volatility returned to levels last seen in early January.

Data for manufacturing output rose last month from 46.4 to 46.9, although it is still some way away from the 50 level which signifies the expansion in the sector.

Donald Trump's MAGA policies, which he hopes will drive a new era of prosperity for his nation, are more likely to drive the country towards a recession, economists believe. There is a significant fear factor prevalent in Wall Street now, where the major banks are concerned about any reprisals Trump will enact should they openly criticize his policies.

Yesterday, Trump announced that he is going ahead with enforcing tariffs of 20% on goods imported from Mexico and Canada and increased the 10% tariff he announced earlier on goods imported from China to 20%.

In announcing his plans, Trump commented that the “time for negotiation is over”, while Canadian Prime Minister Trudeau told reporters that tariffs were a “dumb” idea as he announced “tit-for-tat” measures to counter Trump.

There is a considerable rift developing between what Trump is considering in his economic policies and what the rest of the business community expects from its President.

Trump is using his virtual landslide victory in November’s election as a justification for seemingly isolating the U.S. from the rest of the developed world.

Should he continue at his current pace, America could be unrecognizable in four years.

The government produces many of America’s most important economic indicators. And that data influences the media’s coverage of the economy, which likely colours voters’ views of the President.

These facts have long led partisans to fear presidential manipulation of economic data. Specifically, during Democratic presidencies, conservatives have often looked to dismiss positive economic trends by alleging data manipulation.

Last August, Donald Trump accused the Biden administration of “manipulating jobs statistics” to make unemployment look artificially low before Election Day.

Such allegations have always been baseless. Presidents might have an incentive to tamper with economic data reported by the executive branch. But they have always been constrained from doing so by respect for the independence of data-gathering agencies like the Bureau of Labor Statistics and Bureau of Economic Analysis, fear of scandal, and a desire to provide the private sector with clear and accurate information about economic conditions.

But Trump appears uniquely unencumbered by such constraints. His administration is openly contemptuous of agency independence, arguing that the president should boast unitary authority over all the executive branch’s activities. It also evinces no concern for giving off the appearance of corruption (before taking office, the president set up a meme coin that enables any interest group to directly burnish his net wealth). Trump’s constantly shifting tariff threats indicate an indifference to providing business owners with clarity about the economy’s future trajectory, while his entire history as a public figure suggests an indifference to the truth.

The US Dollar Index, which measures the Greenback's value against six major currencies, suffered another leg lower yesterday, adding to Monday’s losses and falling below its key support of 106.00. Investors dumped the US Dollar after the US confirmed new tariffs on Canada, Mexico, and China, with no last-minute extensions granted. Canada and China announced countermeasures, further stoking market volatility.

The index fell to a low of 105.53 and closed at 105.55. The next material level of support is set at around 105.00 as its recent correction has turned into a trend which could result in a rout.

The ECB is standing and watching as events in the U.S. slip into near farce. The European Union is facing calls to increase its defence spending and is being called upon to develop a more inclusive joint defence policy that could, in time, take over from NATO.

The Bank’s Governing Council will meet tomorrow to vote on a cut to interest rates, with the market overwhelmingly expecting a twenty-five-basis point cut. The outcome of the April meeting is less certain, although one U.S. investment bank, Morgan Stanley, believes that the doves will continue to hold sway, pushing through another twenty-five-point cut.

Cuts at the next two meetings will see rates reach the “fabled” neutral level that the ECB has been searching for since it began to cut rates last year.

The European Union’s unemployment rate was 5.8% in January 2025 and 6.2% for the eurozone, according to Eurostat.

Both figures remained at a historic low for the fourth month in a row, despite the weakness of the eurozone economy. The region's GDP remained stable in the three months to 31 December, compared with the previous quarter.

The number of people out of work totalled 12.824 million in the EU. Compared with the previous month, 8,000 fewer individuals were jobless. In the eurozone, 42,000 people became employed compared to the previous month, thus lowering the number of unemployed to 10.765m in January 2025.

The unemployment rate in Spain, the highest in the EU, started declining over the month. The rate came in at 10.4% for January, after 10.6% in December 2024.

The trend may continue, according to a separate dataset released by the country’s Ministry of Labour and Social Economy. Figures showed that unemployment fell by 5,994 people in February to 2,593,449, the lowest figure seen in 17 years for this month. Analysts had expected an increase of 45,200 people.

Countries with the lowest unemployment rates are the Czech Republic and Poland, both registering a 2.6% total in January.

Considering the eurozone’s stuttering economy, analysts are increasingly expecting unemployment rates to rise in the coming months.

These predictions are also fuelled by the February PMIs from S&P Global, which found that companies in the manufacturing sector cut jobs at the fastest rate in four and a half years.

There is continued fear in the region that President Trump, having threatened to add tariffs to the U.S. imports from three of the country’s largest trading partners, will now “train his sights” on Europe. Given the Eurozone economy's fragility, any tariff imposition could be a disaster.

Yesterday, the euro rallied in keeping with the general selling that the dollar experienced. It finally broke the 1.05 level conclusively. It showed that while there is little interest in buying euros, there is currently even less interest in holding dollars.

It rallied to a high of 1.0623 and closed at 1.0608, reaching levels not seen since mid-November.

As the market settles down following its latest bout of volatility, sellers may emerge that will drive the single currency back into its recent range.

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