14 April 2025: Labour is making “a rod for its own back” over Scunthorpe

The government took the unusual, if not unprecedented, step of recalling Parliament from its Easter recess over the weekend to debate and pass a bill allowing it to take control of the British Steel blast furnace in Scunthorpe.

The actions of Sir Keir Starmer and his Cabinet raise two important questions: First, what happens to the other facilities in the UK situated in Grangemouth and Port Talbot, both of which face similar threats? Second, is Starmer prepared to lose substantial investment from China in UK infrastructure?

Chinese ownership of the facility in Scunthorpe has always been controversial, given the importance of steel production to the economy. The Plant is not “out of the woods” yet. A crucial meeting is scheduled for later today between British Steel staff and civil servants in a desperate attempt to save Britain’s last primary steelmaking plant from permanent closure.

Having taken control of the company, the government has inherited a precarious situation. The immediate challenge is securing essential raw materials, including coking coal and iron ore, to keep the two blast furnaces at the Scunthorpe plant operational.

Failure to obtain these materials will lead to the cooling of the furnaces, potentially causing irreparable damage and ending steelmaking in the Lincolnshire town.

Business Secretary Jonathan Reynolds, who has been thrust into the spotlight recently, was unable to guarantee this would not happen, but said taking over the plant had given the Government “a chance” to save it.

Dozens of businesses, including Indian giant Tata, have rallied to help British Steel with offers of managerial support and raw materials following the Government’s takeover.

The Chancellor of the Exchequer, Rachel Reeves, received welcome news on the economy on Friday. Data showed that the GDP grew by 0.5% in February, significantly more than the 0.1% that had been predicted.

The Office for National Statistics, which published the provisional figures, said a 0.3% expansion in the services sector had driven the surprise jump in growth. In January, services recorded a 0.1% monthly rise.

Industrial and manufacturing output saw a substantial recovery in February, experiencing 1.5% month-on-month growth compared to the monthly contraction of 0.5% seen in January. Construction output also staged a recovery in February, adding 0.4% in the month after falling 0.3% in January.

Analysts believe that the uncertainty created by the tariffs would likely override Friday’s better-than-expected economic data when it comes to the Bank of England’s decision on whether to trim interest rates next month.

Markets are currently pricing in a 25-basis-point interest rate cut from the Bank of England in May, according to recent data, which would bring the base interest rate down to 4.25%.

The pound reached a high of 1.3092 in the aftermath of the data release but drafted lower to close at 1.3054.

The Fed is facing up to two seemingly unrelated economic issues, and it will need to “wait and see” which of them has the greater effect on the economy.

For most of the past year, the Central Bank has been wary of rising inflation. This has meant that interest rates have not fallen as fast as had been predicted, although the level of economic activity and employment growth has allowed it to remain patient about rate cuts.

In the three months since Donald Trump returned to the White House as President, he has told reporters on several occasions that “tariff” is his favourite word, while the financial markets have been driven by another, “uncertainty”.

Investors are often driven by return but are far more interested in guaranteeing the return of their principal sum, which the current level of uncertainty places in jeopardy.

Despite policy shifts under the Trump administration, from tariffs to immigration to federal spending, Federal Reserve Chair Jerome Powell says the U.S. economy remains on solid footing.

While the long-term effects of the policy changes continue to unfold, Powell signalled no urgency to adjust monetary policy, citing a strong labour market. However, easing inflation shows signs of underlying resilience.

As the tariff situation is clarified, inflation may see a short-term rise, but many in the market believe that the fog is going to clear over the next few weeks and that Trump’s measures will bring China to the negotiating table.

The turmoil that Trump has wrought since his announcement of “Liberation Day” on April 2nd is becoming harder and harder to justify.

Speaking at a conference last week, Powell noted that inflation has fallen significantly from its 2022 peak, even though recent progress toward the Fed’s 2% target has slowed.

“We look at inflation, which is the change in prices, and we’re seeing that it has come down quite a bit and unemployment is relatively low, it’s very close to measures of maximum employment and the economy is growing,” he said.

New jobs data released in April showed 228,000 positions added in March, beating expectations. However, the unemployment rate inched up to 4.2% from 4.1%, a reminder that the picture remains fluid.

The data highlight of this week will be the publication of retail sales data for March, which are expected to have seen a healthy increase of 1.3% following February’s anaemic growth of just 0.2%.

The dollar index remains under pressure, falling to a low of 99.31 last week. It recovered marginally to close at 99.69, but there is still latent selling interest on any break on the 100 level.

Despite the significant improvement in sentiment in the Eurozone’s two largest economies, neither Germany nor France is expected to add much growth to the region in 2025.

The German economy is only expected to grow by 0.1% this year, as the measures agreed by the new Government will take a significant time to come into force. With the creation of a 500 billion euro fund to invest in defence and infrastructure, it will take at least until the second quarter of 2026 before its benefits are seen in manufacturing and industrial output.

Meanwhile, France has seen political turmoil die down more as the fiscal budgets for 2025 and 2026 were passed by Parliament. It is an ill wind that does no one any good. Still, Marine Le Pen's five-year ban on standing in any election, effectively barring her from the 2027 Presidential election, will see the far right enter the political wilderness for the rest of the decade.

French Finance Minister Eric Lombard trimmed the government's 2025 growth forecast last week as a global trade war escalates, but said that the government aimed to stick to its deficit reduction plans. The eurozone's second-biggest economy is now expected to grow only 0.7 percent instead of the 0.9 percent it had based its 2025 budget on, Lombard said.

The Bank of France had already revised its growth forecast for 2025 to 0.7 percent in March, and the French Economic Observatory (OFCE) lowered its forecast to 0.5 percent on Wednesday.

Asked about a possible further downward revision, the minister said that "it would depend on the negotiations that will be initiated with the United States and the decisions that are taken on customs duties".

Banque de France Governor Francois Galhue de Villeroy believes that "The greatest element of constancy in US policy of the past decades is the attachment to the central role of the dollar. He commented last week that the Trump administration also has that view, but it is very incoherent in the way it practices that. What has happened in recent days and weeks plays against the confidence in the US currency,"

Meanwhile, Germany's economy is in the doldrums. The new government wants to change this. But leading economists are sceptical about whether they have found the right recipe.

In the past three years, the German economy has not been doing well at all. Entire production sectors in energy-intensive industries have been shut down, and there has been virtually no economic growth. For the current year, leading economic research institutes predict an increase in gross domestic product (GDP) of just 0.1%.

Now, due to the tariffs imposed by US President Donald Trump, a new uncertainty is expected to damage the already weak economy further.

It would be foolish to rely on Trump eventually cancelling all the measures relating to Europe that he has announced since April 2nd, since he still has an axe to grind with Europe over defence spending, but until clarity has been achieved, Europe will have to make its own way.

The euro surged to multi-month highs last week as the European markets suddenly looked more fertile to global investors.

The single currency rallied to a high of 1.1427 and continues to attract buyers on any pullback. It closed last week at 1.1375.

Have a great day!