18 June 2025: Small boats. Yet another crisis on the PM’s plate

The number of foreign private equity firms currently active in taking over UK businesses is currently dwarfing the number of new companies coming to the market via IPOs.

London has seen 30 of its listed firms subjected to takeover bids so far this year, with few signs of any revival in initial public offerings (IPOs) that will be needed to replace them.

Metro Bank became the latest subject of takeover speculation last weekend, while Shareholders in takeaway platform Deliveroo yesterday voted to accept its £2.9bn takeover by US giant DoorDash.

It has been reported that market activity during the past financial year was hit by economic fears and tariff uncertainty, but that the new period has "started more positively" as the Trump administration signed a trade deal with the UK and the Bank of England cut interest rates.

There is still a long way to go before the markets reach past levels, but it now seems that the worst may be over.

The Prime Minister is rapidly finding that opportunities and problems cross his desk in roughly equal numbers. No sooner did he celebrate the slightly skewed victory of a deal removing some trade barriers between the UK and the US than he faced making two potentially humiliating U-turns.

First he faced the publication of the report into grooming gangs which highlighted the issue of ethnicity, which is described as "appalling" and a "major failing", then even though he made an election pledge to “smash the gangs”, he had been forced to admit that the situation is “deteriorating”.

Sir Keir Starmer met French President Emmanuel Macron at the G7 summit in Canada on Tuesday, where the two leaders agreed to boost co-operation in several policy areas at the UK-France summit in London next month.

Number 10 said the leaders confirmed that “migration should be a key focus given the deteriorating situation in the Channel”, and “that they should continue to work closely with other partners to find innovative ways to drive forward progress”.

The comments are a rare admission from the Labour government that it is struggling to achieve one of its key policy priorities to tackle small boat crossings. Chris Philp, shadow home secretary, said that under Starmer’s leadership, the Channel crisis was “spiralling out of control”.

Following the publication of her spending review last week, Rachel Reeves has admitted that it will be a struggle for defence spending to reach the target of 2.6% of GDP during the life of this Parliament.

Reeves is also finding out that running a country is vastly different to being in opposition, since every day brings fresh demands that blow policy rapidly off course, while budgets and spending reviews become little more than wish lists and “nice to haves”. In the real world, life is a totally different animal.

The MPC begins its latest meeting today, with the result of the vote on monastery policy due at 11 am tomorrow.

The odds heavily favour a vote for no change to monetary policy, with uncertainty bringing a note of caution to proceedings. Bank of England Governor Andrew Bailey announced rate cuts in February and last month, and economists believe that one cut per quarter is the plan for the rest of the year.

The pound lost ground yesterday as the developing situation in the Middle East drove investors back into the dollar. Sterling fell to a low of 1.3427, where it ended the day.

Whisper it quietly, but the Fed is doing a great job in fulfilling its dual mandate of maintaining job creation while bringing inflation under control. The FOMC always has to “play the cards it is dealt”, having little or no control over fiscal policies which are often inflationary, like the introduction of tariffs on imports or affect growth like a significant cut in Government spending.

The public is being tricked into believing that Jerome Powell has no excuse not to cut interest rates in the same manner and at the same pace as the ECB, but the U.S. is facing vastly different problems.

First, the economy is not teetering on the edge of a recession, even if growth is slowing and is currently below the optimum level.

In the current economic cycle, inflation reached a high of 7%, which occurred at the end of 2021. The year-over-year inflation rate continued to be high in 2022, reaching 6.5%. By the end of 2023, it had decreased to 3.4%, and further to 2.9% by the end of 2024.

This is despite having to deal with the huge level of support that was pumped into the economy by the Biden administration.

Donald Trump is angry that the Fed can not only deny him when he calls for rates to be cut, but he sees it as an affront to his Administration that Jerome Powell can dictate the optimum target level for inflation, which he has set at 2%.

Trump believes that, as far as the public is concerned, even if inflation were to rise back to its average over the past twenty-five years of 3%, they would be relieved if the FOMC shaved just 100 points off the Fed Funds target.

The entire FOMC, which has been meeting since yesterday, is united in the belief that the current uncertainty caused by the threat of the imposition of tariffs means that they need to be cautious in cutting rates.

The outcome of the meeting will be announced later today, with the prediction overwhelmingly favouring no change.

It seems that the conflict that has erupted between Israel and Iran over the past week is being orchestrated by Trump. He spoke yesterday of his knowledge of the whereabouts of Iran’s Supreme Leader and believes that he is acting magnanimously in “allowing” him to live. Although he has called upon Iran to unconditionally surrender.

It could be argued that since he returned to the White House that the conflicts that existed have worsened despite his pledge to end both the Gaza invasion and the war between Ukraine and Russia “within weeks, if not days”.

There has been a move into the dollar as “risk avoidance” following the conflict between Israel and Iran. The Greenback has rallied to a high of 98.87 as it has found the low that it had been searching for over recent sessions.

When members of the ECB’s Managing Board and Governing Council finish congratulating themselves for driving inflation down to below its target level of 2%, they will be faced with two economic realities.

The first is that they would be well to consider the Fed's dual mandate, where lowering inflation is only part of the job, and the proportion of job creation is equally important. They will also need to evaluate the effect of the strength of Europe over the past three months, which has undoubtedly been a significant factor in lowering inflation.

The region faces significant concerns over the imposition of tariffs that will likely slash economic output and growth, but while the ECB is “cock-a-hoop” over its victory over inflation, no one is “minding the store” regarding growth.

Germany is again being seen as the saviour of the region, and while it is true that the creation of a fund to develop new infrastructure and increase defence spending will be welcome, the other nineteen members of the Union need to step up to the plate.

Any help from investment from Germany will only take effect in the second half of 2026, and the economy may be in recession by then if things turn out badly in tariff negotiations.

It is unlikely that President Trump will give up much ground as he has with China, Japan and the UK, since he has been fiercely critical of Europe’s reluctance to pay what he considers to be a just amount into the NATO budget, which ensures Europe’s safety.

However, Germany's economic indicators are boosting eurozone spirits as investor optimism balances inflation concerns. Investor sentiment toward Germany is improving, as shown by positive ZEW survey results.

Yet, the Middle East conflict could still pose inflationary threats to Europe. Fortunately, recent data offers the European Central Bank some respite. Eurozone inflation is predicted to stay below the ECB’s target for only the second time in four years, with a 1.9% HICP rate year-over-year.

Core inflation is also easing, hitting its lowest level since early 2022 at 2.3%. Key factors include reduced services inflation and lower petrol costs, despite rising food prices.

However, the ECB has warned that US tariffs will slow down economic growth and keep prices low across the Eurozone for years.

This warning came from Luis de Guindos, Vice President of the ECB, during an interview in Frankfurt, according to Reuters.

Despite concerns that the euro’s rise and lower oil prices might drag inflation far below the 2% goal, de Guindos said the bank is not alarmed. “The risk of undershooting is very limited in my view,” he said. “Our assessment is that risks for inflation are balanced.”

While inflation may temporarily dip to 1.4% by Q1 2026, he made it clear that labour market conditions and steady wage growth, which he put at 3%, are expected to hold inflation steady in the medium term.

He also said that tight labour supply and strong union demands are likely to keep pay increases healthy. That would prevent inflation from falling too far off the ECB’s target.

The Euro saw its first significant decline for some considerable time as the market took the risk of an escalation in the Middle East seriously.

The single currency fell to a low of 1.1470 and closed marginally above that level.

Have a great day!