27 March 2025: The anticipated growth rate is cut by 50% by the OBR

No one should question the self-belief of the Chancellor of the Exchequer, Rachel Reeves. She took office last July as the first woman to hold the position and has been incredibly single-minded in executing her plans for the economy.

However, her almost fanatical belief in her methods and the unwavering support of the Prime Minister have led her down a dangerous path, on which she genuinely believes that her way is the only way to achieve her goals of sustainable growth and long-term prosperity.

Using the previous Government as a template for how not to run an economy, she has adopted a puritanical approach to economic and fiscal policy. However, her choices have disappointed her Parliamentary colleagues and traditional Labour voters who returned to the Party in the last election, having been seduced by Boris Johnson's promises four years earlier.

Reeves’s performance since last July has served to underline that the result of the Election was “anyone but the Tories”.

Beginning with the tax rises in last October's budget and culminating in the cuts to the welfare budget announced over the past two weeks, the Chancellor has given an object lesson on how not to achieve her aim of long-term prosperity by creating short-term misery.

The nature of politics is that voters are not particularly interested in promises of what is going to happen in five years; they expect their government to improve their situation in the here and now, not by being reckless but by making decisions that are based upon a sense of justice tempered by fiscal responsibility.

Reeves will have been mortified by the cutting of the 2025 growth prediction in half, as announced by the Office for Budget Responsibility yesterday. This year, growth is predicted to be 1%, down from the previous estimate published in December of 2%.

There has been a marginal increase in the growth expectations for the following years, but voters' minds will have been concentrated on the fact that they are expected to suffer pain now with the promise of an improvement in living standards in years to come without any guarantee that that will happen.

The additional cuts to the welfare budget yesterday were done for two specific reasons. First was a significant increase in defence spending, which was never part of this government’s election manifesto, and second, it has been estimated that the cuts announced by the Benefits Secretary last week will result in a cut of £3.1 billion and not the £5 billion announced at the time.

There is no doubt that Reeves has faced a bruising tenure as Chancellor, and it may well have come to nothing if Keir Starmer sees his Party’s collapsing support borne out by the results of the local elections which take place in early May.

The cost of Government borrowing has risen as the PSBR has increased significantly over the past quarter, with the yield on ten-year Government bonds rising by close to 100 basis points.

The pound returned to test its short-term support yesterday, falling to a low of 1.2874 and closing at 1.2887 as traders became concerned about the resilience of the UK economy in the face of growing global uncertainty.

Donald Trump produces crocodile tears as his undercover plan to force the Federal Reserve to loosen monetary policy despite the threat still posed by inflation continues to drive fears concerning the economy. Consumers are beginning to believe his rhetoric despite hard data currently illustrating an economy which, while not growing at levels seen previously, is sufficiently robust to allow the Fed to leave interest rates unchanged.

Consumer confidence and retail sales have both fallen since Trump took office, driven in no small part by the constant concerns voiced by Trump supporting banks’ analysts and economics teams.

U.S. consumers are pulling back on spending due to persistent inflation and growing concerns about the broader economic outlook, according to consumer financial services company Synchrony Financial SYF.

Purchase volumes have declined across the industry as individuals, regardless of income level, become more selective about their spending habits.

While consumers' finances remain generally stable, they are accumulating more debt, and delinquencies on auto loans, credit cards and home credit lines are gradually increasing. The Federal Reserve flagged this trend last month, and analysts are closely watching spending patterns for early signs of financial strain.

Consumer confidence has weakened, and with inflation expectations climbing, people are becoming more cautious with their money. Synchrony has observed that while most customers are still managing to meet their loan payments, there is a noticeable shift in spending behaviour.

Retail giants such as Target and Walmart have echoed similar concerns, noting that consumers are delaying purchases, waiting for discounts, or opting for lower-cost alternatives.

Some economists are warning that concerns over potential inflationary effects from President Donald Trump's tariffs could hinder economic growth, with some warning that in the medium term, GDP could fall by 1% should he enact all the tariffs he has threatened.

Yesterday, the President announced a 25% surcharge on imports of foreign-made cars.

The reduction in household spending could be an early signal of rising late payments and potential loan defaults, according to industry analysts. While default rates remain steady for now, the slowdown in consumer spending is being closely monitored.

Additionally, borrowers may become more conservative in taking on new loans, affecting banks that rely on loan growth as a key revenue driver.

Industry-wide loan growth slowed in February compared to the previous year. If this trend continues, banks could face declining net interest income and lower overall revenue.

Minneapolis Federal Reserve Bank President Neel Kashkari yesterday said he's uncertain about the effect of President Donald Trump's tariffs on the U.S. economy, with the possibility that they could push up prices arguing for higher interest rates and the chance that they could slow economic growth calling for reducing borrowing costs.

Together, those forces are "kind of a wash," he told the Detroit Lakes Chamber Economic Summit, meaning that the Fed should "just sit where we are for an extended period until we get clarity."

The dollar index saw further consolidation yesterday, even as traders remain unsure of the medium-term path for the economy. It rose to a high of 104.63 and closed at 104.54.

Spain remains in the lead as the strongest economy in the European Union. While this is good news for the country and the region, it serves to illustrate the issues that the EU’s two largest economies, Germany and France, faced in 2024.

While France is still wallowing in political and debt issues, Germany has decided to throw off its cloak of fiscal conservatism and increase its Government borrowing by creating a five hundred billion euro fund to invest in infrastructure projects and the manufacturing sector.

The boost that has been provided to investor confidence is likely to begin to flow through into hard data via increased consumer confidence and retail sales in the coming months.

Meanwhile, Spain has taken up the mantle of the region's star performer.

Powered by strong household spending, resilient investment and a tourism sector showing little sign of fatigue, the country delivered the Eurozone's strongest growth performance in 2024.

The result signals a new era of economic dynamism for Madrid.

Spain’s GDP expanded by 0.8% QoQ in the fourth quarter, according to the Spanish Statistics Agency.

In the full year, the economy grew by 3.2%. Only Malta, Cyprus and Croatia produced comparable full-year figures.

There is a growing sense of improvement across the entire Eurozone economy, doubtless driven by increasing optimism that Germany is finally emerging from the doldrums that were created by a “perfect storm of events”, including the war in Ukraine, soaring energy costs, the reliance on an outdated heavy industry sector and the arrival of Donald Trump in Washington.

The European Central Bank has pushed back against calls to loosen rules for eurozone banks, despite fears they could fall behind US rivals if President Donald Trump implements major deregulation.

Trump's return to the White House has fuelled expectations among major US banks of lighter regulation, and he is seen as likely to scale back the confrontational approach of Joe Biden's administration.

In the final month of Q1, Eurozone private sector activity increased further on the back of rising optimism in the German manufacturing sector. Weak domestic demand has been one factor contributing to the industrial malaise.

In addition to the anticipated rise in future demand, temporary factors have driven up current output. With the output component of the flash PMI entering expansionary territory for the first time since March 2023, the eurozone industrial sector may also be benefiting from US customers accelerating their eurozone industrial orders ahead of potential tariffs.

The euro is in familiar territory, having fallen for six consecutive sessions as the market considers the possibility of rate cuts continuing for the entirety of the second quarter as inflation returns to its 2% target.

It fell to a low of 1.0744 and closed at 1.0753 yesterday.

Have a great day!