13 June 2025: There is a significant possibility of tax rises later in the year

It is difficult to imagine that Chancellor of the Exchequer, Rachel Reeves, was unaware of the monthly GDP data due to be published less than twenty-four hours after her speech in which she outlined the Government’s spending plans for the next three years.

Having lambasted the previous Government for making unfunded commitments to future projects, Reeves is doing the same by relying on future economic growth, which is by no means certain.

The Office for National Statistics released GDP figures for April yesterday, which showed that the economy shrank by 0.3% following a 0.2% increase in March. The news would have been a blow to Reeves, when asked for a reaction, she told reporters that she was disappointed but gave the impression that not only was the data a surprise, but that it was not her fault, despite the rises in Employers’ National Insurance contributions and other measures that came into force in April.

She also refused to rule out further tax increases when she delivers her second budget to Parliament in the Autumn.

The Chancellor appears to have got her priorities reversed. She is announcing spending plans before she has the means to pay for them. This is not dissimilar to Liz Truss’ strategy, which has been held up as a model of how not to run the economy.

It does appear that she has an unwavering confidence in her belief that “things will come good” eventually, and she is making tough decisions while she cuts the “dead wood” out of the economy.

There were multiple reasons for the decline in UK activity in April. Firstly, production was hit by US reciprocal tariffs. Manufacturers such as Jaguar Land Rover halted production in April, only to reinstate it after the UK reached a trade agreement with the US in May.

This is one of the reasons why car manufacturing stalled in April after growing in the first quarter. Thus, we may see production bounce back in May and beyond.

Added to this, legal and real estate firms saw growth rates dip in April, according to the ONS. This was due to a sharp increase in house sales in March, before the changes to stamp duty came into effect in April. Since then, housing activity has picked up, so this could be another temporary weight on UK growth that fades as we move through Q2.

The pound weakened against other major currencies in the European session, reflecting a fall in services output. The production side of GDP showed that services output contracted 0.4%, reversing March's 0.4% rise.

Industrial production decreased 0.6 percent, which was slightly slower than a 0.7 percent drop in March. By contrast, construction output grew at a faster pace of 0.9% after rising 0.5% a month ago.

Another report from the ONS showed that the visible trade deficit widened to GBP 23.2 billion in April from GBP 19.9 billion in the previous month. The deficit was forecast to rise to GBP 20.8 billion.

The weaker-than-expected UK GDP statistics, together with the disappointing UK employment data reported earlier this week, may raise market expectations that the Bank of England (BoE) will cut interest rates by more than investors had previously anticipated.

The pound eventually closed at 1.3612, almost exactly where it opened earlier in the day.

Whatever else he says, it is impossible to ignore that during Donald Trump’s first few months in office, the U.S. has lost the confidence of international markets, with the dollar losing more than 10% of its value.

Trump would most likely counter by saying that his MAGA programme does not feel the need to placate other nations. A 10% fall in the dollar will make imports more expensive, while making U.S. goods cheaper in overseas markets. This is far more akin to Trump’s demands.

However, it also points to the likely effect of the imposition of tariffs, which will come into full force next month and is a significant factor in why the FOMC does not feel the need to cut rates due to the uncertainty of the current environment.

On paper, things might look comfortable. The unemployment rate is low at 4.2%, and inflation rose just 0.1% in May.

However, the economy employs real people in real jobs producing goods and services that are in demand to a greater or lesser extent, often depending on consumers' confidence. If they feel that their homes and jobs are secure, they are far more likely to buy that new car or invest in a major home renovation.

Despite a seemingly good economy where good news is driven home hard, while bad news is often swept under the rug, jobseekers are telling ever more stories of spending months chasing work only to come up empty-handed handed, And while inflation is hardly rampant, it is not falling to the extent that the long period of tight monetary policy should be seeing.

JPMorgan CEO Jamie Dimon has warned that the economic stimulus from the pandemic has run its course, leaving consumers with depleted savings and raising concerns that inflation could rise while employment falls, posing a challenge for the Federal Reserve’s dual mandate.

Dimon suggests the upset has been brewing for some time, as opposed to being symptomatic of recent volatility in economic and foreign policy.

Trump has seized on this recently, blaming the previous administration of Joe Biden for the storm clouds that may or may not be gathering.

Trump cited new inflation data in continuing to pressure Federal Reserve Chair Jerome Powell to lower interest rates, calling him a "numbskull" but adding that he won't seek to remove him.

“We can’t get this guy to do it," Trump said of Powell lowering rates. "And the fake news is saying, 'Oh, if you fired him, it would be so bad.' I don’t know why it would be so bad, but I’m not going to fire him.”

The dollar index fell to a low of 97.61 yesterday before attempting a rally, which reached 97.99 before being snuffed out, leading to a close of 97.85.

Far from dealing with the issue of Tariffs being introduced on its exports to the U.S., the European Union is looking in the opposite direction and promoting an increase in trade with China.

European Central Bank President Christine Lagarde called on the European Union and China to deepen understanding and trust to cultivate better economic and trade relations, and expected the financial institutions of both sides to enhance cooperation.

During her visit to China, Lagarde covered topics including economic relations, challenges, and cooperation.

Data from the Ministry of Commerce of China showed that the EU investment in China increased by 11.7% in the first quarter of this year, while the recent survey of the European Chamber of Commerce in China also suggested improved sentiment.

Lagarde said that the investment growth indicated an enhanced confidence in China's development, and she expected that the two sides would further deepen mutual understanding so that these investments could be effectively utilised and generate returns.

What she didn't say was that the investments in China and the encouragement of investment by China in Europe are a reaction to the threatened hegemony of Donald Trump. It is a way of showing the U.S. President that he is not the only game in town.

"Cross investment means a stronger commitment to a particular country because you put your money in the country, you invest, and you expect the return of that investment.

We need to all make sure that those investments are safe and secure, that the return on investment is safe and secure and is not under threat.

We need to have a good understanding of those areas that are of high value for security purposes, for instance, on both sides, and to have a good understanding of it between us," she said.

The Eurozone’s resilience to withstand economic shocks and challenges while maintaining stability and growth is becoming stronger. Several factors contribute to the resilience of the Eurozone, as well as the challenges that it faces.

The European Central Bank (ECB) plays a crucial role in maintaining stability through its monetary policy. By setting interest rates and implementing quantitative easing measures, the ECB can respond to economic downturns and inflationary pressures, helping to stabilise the economy.

While fiscal policy is primarily the responsibility of individual member states, there have been efforts to enhance fiscal coordination within the Eurozone. Initiatives like the Stability and Growth Pact aim to ensure that member states maintain sound fiscal policies, which can contribute to overall economic stability.

European Central Bank Executive Board Member Isabel Schnabel stated yesterday that ECB interest rates are in a "good place" now, even as inflation is expected to slow.

Schnabel explained at a seminar that the projected slowdown in eurozone inflation, forecast by the ECB to reach 1.6% in 2026 compared to 1.9% last month, is only temporary.

This temporary dip is primarily due to energy price-based effects and the stronger euro exchange rate.

"Inflation is projected to get below 2% over the short term, and this is to a large extent driven by energy and the exchange rate," Schnabel said. "But we also see that inflation is projected to return to 2% over the medium term."

The euro climbed to a high of 1.1628 and is now strongly focused on the 1.20 level as a medium-term target. With the U.S. administration treating the dollar with “benign neglect”, the euro could easily reach that target, particularly if rate cuts in the region are paused.

Have a great day!