18 March 2025: Reeves faces further criticism

The Chancellor will present her spending review to Parliament before the end of the month, but it is where she will find room to make savings that are grabbing the attention of market analysts and practitioners.

The Work and Pensions Minister will add some meat to the bones of the basic proposals that have already been made as she tells MPs where the cuts to the welfare budget will be made.

Liz Kendall has insisted in recent interviews that changes to benefits, both in value and qualification, will be fair and sustainable.

Many backbench Labour MPs see the changes to welfare as being “austerity by stealth” a charge denied by the Prime Minister.

By slavishly following rules of her own making, Reeves is providing herself with a “get out of jail free card” which she will play when she is challenged over her spending plans.

Those same labour MPs have said that they would prefer the Chancellor to increase borrowing rather than “punish” the most vulnerable sector of the economy.

It was an “old labour” policy to borrow to fund a burgeoning welfare bill, but Starmer and Reeves have said that the current welfare arrangements are both unfair and unsustainable.

Kendall said the plans, to be published later today, would put rising benefits expenditure on a "sustainable footing". The Cabinet has already abandoned plans for a one-year freeze to PIP payments, after disquiet from MPs. Instead, it is thought that the changes announced later will now focus on eligibility for PIP, which recipients claim following an assessment to help meet daily living costs from long-term physical or mental health conditions.

UK growth will be weaker than previously expected this year and next, according to the OECD, as The Chancellor struggles to inject momentum into the economy.

The Paris-based body on Monday trimmed its UK GDP growth estimate for 2025 to 1.4 per cent, a 0.3 percentage point reduction from its previous calculation, following a disappointing recent economic performance.

Countries across the world, including the UK, are braced for mounting pressures from US President Donald Trump’s trade war.

The latest OECD forecasts factor in Trump's 25 per cent tariffs on imports from Canada and Mexico, his 20 percentage point levy increase on China, and US taxes on steel and aluminium that affect nations including the UK.

The second quarter of the year will begin with that market trying to decipher the ramifications of the spending review, which will be delivered a week from tomorrow.

Next month, the rise in both the national living wage and employer’s NI contributions is expected to see growth suffer.

The pound began the new week with another attempt to break strong resistance at 1.30 versus the dollar. It reached a high of 1.2998 and closed at 1.2991.

The “S” word has been uttered amongst the analysts and economists of Wall Street as the Federal Reserve continues to be committed to lowering inflation as it battles to make sense of President Trump’s economic policies.

Stagflation is a mythical beast which is often threatened but rarely delivered as Central Banks try to promote conditions which deliver inflation-free growth.

As FOMC members gather for their six weekly meetings to agree on any changes to monetary policy, they are still not finding anything other than anecdotal evidence that the economy is facing a slowdown.

The market believes that the imposition of tariffs on U.S. imports will more likely see inflation rise that have its desired effect, which is to bring a greater number of jobs in the manufacturing sector back to U.S. shores.

Until the inflationary effects of the tariffs have been seen, the Fed is not going to cut interest rates, risking having to reverse that decision should inflation rise again.

There is currently little or no sustainability to the path for inflation. It is in a period where the measures that have been taken over the past two years are taking effect, while the FOMC has decided to “allow” changes to the policy to take effect.

Fed Chair Jerome Powell is in favour of fewer changes in interest rates, a similar policy to that championed by UK MPC member Catherine Mann recently. It is likely that, given his way, Powell will opt for a full two months between meetings.

When Federal Reserve officials last met in late January, things looked pretty good. The employment market was solid, the economy had just grown at a solid pace in last year's final quarter, and inflation, while stubborn, had fallen sharply from its peak more than two years ago.

Many analysts are trying to shoehorn the data into their narrative for a slowing economy, despite no tangible evidence to back their theories.

The economy added 151k jobs in February, even as the January number was revised significantly lower.

Powell would no doubt appreciate a meeting with President Trump to gain a little foresight into his intentions for economic policy. Unfortunately, all he would receive is the “broad brush strokes” of what Trump wants to achieve as he leaves the detail to his minions, of which he considers Powell to be one.

It rankles with Trump that he is unable to control the Fed in the same way he is controlling the rest of his administration, but he will face an impossible task to try to bring the Central Bank under his control, and he obviously doesn’t believe that it is a fight worth pursuing at the moment, since he has other “fish to fry.”

The dollar is testing its medium-term support level at 103.30 constantly and should it break, the fall to the 100 level could be rapid.

With a peace deal for Ukraine set to be discussed between Trump and Russian President Vladimir Putin later today, the outcome may be the critical pivot point for the dollar’s recovery.

The index fell to a low of 103.30 yesterday and closed at 104.40

There is a feeling at the ECB that it may have missed the opportunity to see inflation consistently challenging its 2% target during the current monetary policy cycle.

As the European Union considers significant spending increases to enable it to increase its defence in the face of threats from the U.S. to reduce Europe’s reliance on it, there will be a significant inflationary “bounce” over the next two quarters, which, despite the ECB being able to understand why it is happening, may be powerless to lower.

The OECD has lowered its eurozone GDP growth forecast to 1.0% for 2025, down from 1.3% in December, citing weak investment and rising geopolitical risks. Global growth is also revised down to 3.1% as trade disruptions weigh on sentiment.

The downgrade reflects slowing investment and subdued consumer confidence amid mounting geopolitical and trade risks. Meanwhile, global growth is also expected to weaken, with the OECD cutting its forecast by 0.2 percentage points to 3.1%.

The revised projections were published on Monday in the OECD Economic Outlook, Interim Report March 2025, which warns that global growth is slowing amid rising trade tensions and lingering inflationary pressures. The report highlights a fragile recovery in Europe and significant risks stemming from economic fragmentation.

Germany, the bloc’s largest economy, faces the sharpest revisions, with GDP now expected to grow just 0.4% in 2025, down from 0.7% previously.

France and Italy also saw slight downward adjustments to 0.8% and 0.7%, respectively.

Spain remains a relatively bright spot, with growth forecast at 2.6% for 2025 and 2.2% for 2026, slightly above prior estimates.

The OECD warns that escalating trade barriers and geopolitical uncertainty could further weaken global growth.

“Further fragmentation of the global economy is a key concern,” the report stated, adding that “higher and broader increases in trade barriers would hit growth around the world and add to inflation”.

If trade restrictions continue to spread, global GDP could fall by 0.3% over the next three years, while inflation could rise by 0.4 percentage points annually.

Donald Trump’s policies are causing more uncertainty for the economy than there was during COVID-19, according to European Central Bank Vice President Luis de Guindos.

“We need to consider the uncertainty of the current environment, which is even higher than it was during the pandemic,” he was cited as saying. “What we’re seeing is that the new U.S. administration isn’t very open to continuing with multilateralism, which is about cooperation across jurisdictions and finding common solutions for common problems. This is a very important change, and a big source of uncertainty.”

Several ECB policymakers have highlighted their worry about the impact of a brewing trade war in recent days with President Christine Lagarde saying an escalation of disputes over trade levies may have a detrimental effect on the world economy.

Similarly, Spanish Economist Jose Luis Escriva commented on Friday that assumptions for inflation and economic growth face big risks in each direction and that such unpredictability makes it impossible to predict further interest-rate moves.

The Euro is experiencing significant selling interest as it approaches the psychologically important 1.10 level. Traders are using orders they have at just above 1.10 to allow them to get ahead of the market by establishing short positions in the 1.0900s.

Yesterday, the common currency reached a high of 1.0929 and closed at 1.0920.

Have a great day!