16 January 2026: Starmer pushes the boundary of good taste

There is no doubt that the Chancellor will be cock-a-hoop over the latest monthly GDP figures, which were published yesterday. She will say that her plan is working and that the good times are just around the corner. The majority of the 0.3% growth the economy achieved in November was due to production at JLR, following a cyberattack that halted production at their various plants and had a knock-on effect on many of their suppliers.

Gross domestic product expanded by 0.3% on the month - the fastest growth since June, after a decline of 0.1% in October.

Economists said the figures also suggested that nervousness about Chancellor Rachel Reeves' annual budget statement on November 26 had not affected output as much as feared.

Before the data, economists polled by Reuters had forecast that GDP would expand by 0.1% on a month-on-month basis, largely due to the boost from the recovery in production at JLR.

Sterling briefly jumped in value against the U.S. dollar after the data, with short-dated British government bond yields rising. Investors continue to price in almost two 25-basis-point interest rate cuts by the BoE this year.

Just under half of November's growth was accounted for by a 1.1% rise in industrial output, which in turn was driven by a 25.5% rise in car production, the most significant monthly increase since July 2020 when COVID restrictions eased.

Output in Britain's dominant services sector also grew by more than expected in November, rising by 0.3%, recouping its 0.3% fall in October.

Previous surveys of Britain's economy had shown signs of stumbling ahead of the budget, as speculation about possible tax increases weighed on it.

The Office for National Statistics said firms across the economy reported they and their customers had been awaiting the outcome of the budget in November, as they had been in October, including in the construction sector, where production fell sharply for a second month in a row.

The British Chambers of Commerce commented that companies were not showing much relief after they were spared a repeat of the significant tax increases included in Reeves' first budget in 2024. Firms are telling us they're still cautious about investing and recruiting, which means growth will remain limited for the foreseeable future.

The Bank of England expects Britain's economy to have flatlined in the fourth quarter of 2025, although it thinks underlying growth is running at about 0.2% a quarter.

In the three months to November, the economy grew by just 0.1%, the ONS said, though that was markedly faster than the 0.2% decline forecast in the Reuters poll, partly due to an upward revision to September data.

The Prime Minister ignited laughter, discomfort and political backlash in the House of Commons during Prime Minister’s Questions after delivering a controversial jibe at the Conservatives. Responding to opposition attacks over Labour’s policy reversals, Starmer remarked that the Conservatives had “more positions in 14 years than the Kama Sutra,” a comment that drew stunned silence across the chamber and quickly dominated headlines.

The remark came as Starmer defended his government against accusations of repeated U-turns, following Labour’s decision to abandon plans to make digital ID cards mandatory for right-to-work checks in Britain. Conservative leader Kemi Badenoch seized on the reversal, calling the proposal a “rubbish policy” and accusing the Prime Minister of inconsistency and poor governance.

The right wing of British politics saw a seismic shift with Justice Minister Robert Jenrick's defection from the Conservatives to Reform UK. Jenrick had been dismissed from both the Shadow Cabinet and the Conservative Parliamentary Party earlier in the day when its leader, Kemi Badenoch, said she had discovered irrefutable evidence that he was about to defect in a most damaging manner to the Party.

The pound fell to a low of 1.3362 following the release of the data and closed at 1.3475.

Introducing the highest U.S. tariffs since the Great Depression, President Donald Trump made a clear promise in the spring: “Jobs and factories will come roaring back into the country.”

This has not been the case… yet.

Manufacturing employment has declined every month since Trump declared “Liberation Day” last April, when he said his widespread tariffs would begin to rebalance global trade in favour of American workers. U.S. factories employ 12.7 million people today, 72,000 fewer than when Trump made his Rose Garden announcement.

The trade measures that the president said would spur manufacturing have instead hampered it, according to most mainstream economists. That’s because roughly half of U.S. imports are “intermediate” goods that American companies use to make finished products, like aluminium that is shaped into soup cans or circuit boards that are inserted into computers.

So while tariffs have protected American manufacturers such as steel mills from foreign competition, they have raised costs for many others. Auto and auto parts employment, for example, has dropped about 20,000 jobs since April.

“2025 should have been a good year for manufacturing employment, and that didn’t happen. I think you really have to indict tariffs for that,” commented the director of the Centre for Business and Economic Research at Ball State University in Indiana.

Small and midsize businesses have found Trump’s on-again, off-again tariffs especially troublesome. 57% of midsize manufacturers and 40% of small producers said, in a November survey by the Federal Reserve Bank of Richmond, that they had no certainty about their input costs. Only 23% of large manufacturers shared that complaint.

Smaller companies were also more than twice as likely to respond to tariffs by delaying investments in new plants and equipment, the survey found. One reason could be that taxes on imports raise the price of goods used in production much more than they do for typical consumer items, according to a study by the San Francisco Fed.

Industries producing more technologically complex goods, such as aircraft and semiconductors, are also paying an outsize price, according to the director of the international politics and economics program at Middlebury College. Makers of semiconductors, for example, shed more than 13,000 jobs since April.

Trump's demands to take over NATO ally Denmark's territory, Greenland, have thrust alliance chief Mark Rutte into an uncomfortable position.

His strategy for now: say as little as possible and try to change the subject.

Facing warnings that the crisis could tear the 76-year-old military alliance apart, the former Dutch premier has sought to keep himself and NATO out of the fray.

Instead, he's tried to deflect Trump's desires by stubbornly focusing on joint efforts to boost Arctic security, dodging tricky questions and even continuing to praise the US leader.

That approach hasn't always gone down too well.

In barely disguised support of Fed Chairman Jerome Powell, Federal Reserve Bank of Kansas City President Jeff Schmid said he will continue to vote against any US decision to lower interest rates because he’s concerned that economic growth and investment will put upward pressure on inflation.

“At present, the economy is gaining strength, but inflation is still running too high,” Schmid remarked during a speech in Kansas City. “Lowering rates now could undermine our efforts to control inflation without offering significant support to the labour market. In my view, monetary policy isn’t especially tight presently.”

Known for his hawkish stance, Schmid has voted against the last two Federal Reserve decisions to cut the benchmark interest rate by 25 basis points, arguing that such moves could fuel further inflation.

He also noted that the so-called neutral rate, the interest rate that neither accelerates nor slows economic growth, has increased, making the current 3.5% to 3.75% range less restrictive than before.

While Schmid acknowledged that housing and rental prices are starting to cool and remains optimistic that inflation will eventually subside, he stated, “I’m hesitant to change course until there’s clearer evidence that overall inflation is moving downward.”

Recent inflation figures, including the December Consumer Price Index, indicate that inflation is hovering around 3%, according to Schmid. He added that inflation and rising prices remain a major topic of concern in his conversations with local businesses.

Schmid cautioned that lowering rates could jeopardise the stability of low inflation, which is crucial for households and businesses making financial decisions.

He also pointed out that last year’s government shutdown has complicated the Federal Reserve’s ability to assess inflation using official data accurately.

The dollar index continues to be driven by traders’ desire to test the market's resistance to a move above the 100 level. There are rumoured to be substantial sell orders around the 100.20 level, so it is doubtful that that level will be broken at the first attempt.

November’s robust 0.7% gain marks the third consecutive rise in production. While the coming months may be disappointing, the industrial outlook is improving, with investments set to lift output over the course of the year.

Industrial production experienced a wild ride in 2025. First, it saw a significant boost from the lacklustre levels seen in late 2024, driven by American front-loading of European products. After that, production petered out somewhat as front-loading ended, but now it looks like there’s new life to the eurozone industrial recovery.

With increases in September, October and November, production now stands at the highest level in two-and-a-half years, not counting the bumper month of March ahead of Trump's tariffs announcement in April.

Getting a clear sense of direction for production remains tough for the industry in the short run. With more domestic investment expected, production should increase, but the question is whether we are already seeing a meaningful rally. The growth in November was mainly driven by capital goods production, which is now 3.6% higher than a year ago. Most large economies in the eurozone have seen growth recently.

At the same time, the manufacturing PMI has shown weakness, declining from 50.7 in August to 48.8 in December. This indicates that while optimism about the coming year remains among manufacturers, the question is whether we’ll see a continued rebound in production in the months ahead.

It may be volatile, but the Eurozone industry is showing more signs of life as investment plans are translated into action.

The biggest threat to European banks' competitiveness remains the fragmentation of the European market rather than the capital rules imposed by the bloc, said European Central Bank Vice President Luis de Guindos. While recommending streamlining some complex or overlapping EU capital rules, the ECB opposes lowering capital levels.

Capital, liquidity, and solvency rules are not limitations to the capacity of the banks to lend,” he told the European Parliament’s Economic Affairs Committee in Brussels.

On the contrary, he said those rules provide a competitive advantage for European banks. He argues that the way the EU implemented international capital standards “has paid in terms of valuation for the banks,” with a reduced gap between U.S. and EU banks’ valuations and an increased return on equity for European banks since before COVID.

“Banks should acknowledge that,” he said.

Asked about the ECB’s recent recommendations on banking supervision simplification, he acknowledged that “the wide range of different macro prudential buffers creates a little bit of confusion for institutional investors.”

The Central Bank’s recommendations include reducing the number of elements in the risk-weighted and leverage ratio frameworks, establishing a simpler prudential framework for smaller banks, and simplifying the design of banks’ capital requirements and buffers. These recommendations have been sent to the European Commission, which is expected to present a report on the banking sector's competitiveness this year.

However, De Guindos insisted on the importance of ensuring that simplification does not “undermine the level of capital of the European banks.”

Germany, Europe’s biggest economy, has just seen a flurry of improving numbers after three largely lost years.

Last week, a 5.6% monthly jump in factory orders, defying predictions of a drop, and an unexpected increase for industrial production, began to stoke hopes of green shoots emerging.

Then, yesterday, the statistics office revealed a 0.2% increase in gross domestic product in the fourth quarter, based on a sketchy initial measurement that is the first of its kind for any Group of Seven economies.

All that suggests a foundation that could enable Chancellor Friedrich Merz’s massive stimulus package, focused on infrastructure investment and a wholesale retooling of the country’s military, to start to have an effect finally.

The Euro lost further ground to a currently dominant dollar yesterday. The common currency fell to a low of 1.1593 and closed at 1.1604. It is entering a significant support area, which coincides with sell orders on the dollar index, indicating the possibility of a mild correction.

Have a great day!