21 July 2025: The country could be in recession by year’s end

Reform UK Leader Nigel Farage appeared on TV yesterday and was scathing about the Government’s commitment to its net-zero policy and subsidies being paid for the production of solar and wind energy.

The UK is responsible for less than one percent of the production of greenhouse gases that are responsible for global warming and climate change. Yet, it has destroyed its heavy engineering manufacturing base by exporting it to countries like China and India, which continue to ignore the issue.

Farage believes that in the coming years, as the UK’s infrastructure is upgraded, particularly its transport network, despite the fiasco that is HS2, there will be a huge requirement for steel that will now have to be imported from overseas.

While he did not say it for fear of upsetting his friend Donald Trump, Farage intimated that trade has recently been weaponised, and the only way to protect the country is to produce the necessary items locally.

At the current point in the economic cycle, Governments are looking to their Central Banks for help in contributing to growth by lowering interest rates as the global inflation created by the aftermath of the Pandemic recedes.

At times like these, Central Bank independence comes under scrutiny, as has been seen recently in the U.S., as President Trump pillories Fed Chairman for his tardiness in lowering interest rates since he appears to be more concerned about inflation than growth, even though Trump’s trade policies are causing the current uncertainty.

In the UK, there is an uneasy relationship developing between the Treasury and the Bank of England, with Chancellor of the Exchequer Rachel Reeves determined to drive growth and needing the help of lower interest rates to do so. She has two major reasons to want rates to be lowered.

The first is to put more money in the pockets of homeowners by lowering the cost of their mortgages, and, second, to reduce the interest burden on the country’s burgeoning debt pile.

The relationship between the Bank and the Government has remained civil, certainly more so than on the other side of the Atlantic, but Reeves may start at some point to play the blame game, given her unassailable confidence that the policies that she has brought in are absolutely the correct ones to produce growth, prosperity, and a lower cost of living,

So far, the Prime Minister has not become involved in the issue other than, when forced, to express total confidence in Reeves. That situation could change if the country begins to face a period of recession, as has been predicted in some circles already.

Harking back to the eighties when Margaret Thatcher deregulated the equity markets and gave people incentives to invest in newly privatised firms like British Gas and British Telecom, Reeves wants to encourage pension funds to invest in UK firms, but today, the market has moved on and investment has become a far more global activity.

It is a story for another day whether Thatcher's plans were right, given the turmoil in the water industry recently.

However, encouraging pension funds to invest more in UK businesses is a dangerous game for Reeves to be playing. It is currently making her the darling of the City, but should the tide turn, as it always does, and returns on investments begging to fall, she is making herself a ready-made scapegoat for the industry.

Reeves is an unusual Chancellor in that she often leans towards trusting in luck, a policy which, so far, has not served her particularly well. She may well be making another rod for her own back. Only time will tell.

The pound lost ground for the third consecutive week last week and has now lost all the gains it made in the last week of June.

It fell to a low of 1.3365 and closed at 1.3416.

President Trump remains coy about whether he plans to dismiss Fed Chairman Jerome Powell, quite possibly hedging his bets in case the rising rate of inflation is made worse should there be a series of rate cuts between now and the end of the year.

Market consensus is that there will be a rate cut early next month when the FMC next meets, but it is not expected to be a prelude to the Fed “doing an ECB” and cutting rates at a long series of meetings.

The FOMC is, surprisingly, a more conservative institution than the ECB and prefers a policy of wait and see both when rates are cut, and how many cuts there are in a series.

Donald Trump’s second term is now six months old. For all the fears around the US president’s tariff-raising agenda, those who believed the American economy would do just fine are feeling vindicated by a few recent data points.

In June, job growth beat expectations, and inflation data showed only modest signs of a tariff-related bump. The S&P 500 closed at a record high on Thursday. The second-quarter earnings season has so far delivered “better than expected” results for America’s largest companies, too.

This year has been a period of wait and see, given the number of policy changes that have been adopted, as Trump wants to show how different he is from Biden. He is an impatient man and the President.

He clearly cannot understand what rates have not been slashed, unable to understand the caution that surrounds the Fed's reaction to his threat of applying tariffs to U.S. imports of raw materials and finished goods.

While it is an admirably “American” theory to buy American, consumers have become used to watching Samsung Televisions, driving Mercedes cars, and drinking French wine, which, heaven forbid, are superior products to those created or manufactured locally.

Last week, it became apparent that Powell’s days at the Fed were numbered as Trump told a group of visitors to the White House that he had already drafted a letter dismissing him, only to deny it hours later.

It has become clear that there is a nagging doubt in the back of Trump’s voluminous mind that he may need a scapegoat to blame should things go wrong with his economic policies.

While there is little reason to expect upcoming data, particularly the July employment report, will be anything other than supportive for the economy, August 10th is the day on which Trump will “circle back” regarding the imposition of tariffs on America's trading partners.

The dollar is showing tentative signs of a recovery. Last week, it attempted to break above short-term levels of resistance, but traders and investors remain sceptical about showing faith in an asset that has so much uncertainty attached to it.

The index rose to a high of 98.93 last week and closed at 98.47.

It must be keeping Donald Trump up at night as the European Union refuses to be cowed by the threat of a blanket tariff of 30% on American imports of goods and services produced in the Eurozone.

There is a resilience being displayed by Brussels that he must feel defies logic.

The Eurozone has reduced interest rates sufficiently, it believes, to deal with the economic circumstances of any Trump-enforced economic downturn.

Just weeks after European Central Bank president Christine Lagarde hailed a “global euro” moment and said the common currency could rival the dollar, some inside the central bank are wondering if the euro’s strength could become too much of a good thing.

The euro has soared 14 percent against the dollar in 2025 to reach its highest level in nearly four years as investors pile into European assets to shelter from US policy volatility, upsetting predictions it would hit parity with the greenback this year. Of course, it still could

The rise came despite a mounting divergence in interest rates between the US and the much lower rates in Europe, an upending of the usual market dynamics.

At the ECB’s three-day annual conference in Sintra, Portugal, its Vice-President, Luis de Guindos, was most outspoken, telling Central Bankers that “we should try to avoid any sort of overshooting”.

If all else remains the same. Which it seldom does in the global economy, a euro valued at $1.20 would see inflation fall well below the ECB’s 2% target, which it has managed to reach despite the long series of interest rate cuts.

As we begin the second half of 2025, the global economy shows increasing signs of a slowdown, fuelled by escalating tariff pressures, rising geopolitical tensions, and persistent structural challenges.

The divergence in unemployment developments is stark.

Spain, Greece, Portugal and Italy have seen large relative declines in unemployment, while Germany, the Netherlands, Belgium and Austria have seen their unemployment rates creep up, as would be expected due to an economic downturn.

The stronger job market is also reflected in job creation.

While southern eurozone countries have continued to see solid job growth in the private sector over the past two years, this has completely dwindled in the north.

In Spain and Italy, for example, the most robust job growth has been seen in the wholesale and retail sector, with construction experiencing a similar impact.

Professional and scientific services have also emerged as a strong job growth engine. No broad sector has seen job declines in Italy, while in Spain, there were very small declines in finance and agriculture.

It is unlikely that this trend will continue, with Germany placing huge faith in the creation of its infrastructure fund, which is expected to aid job creation from mid-2026 onwards.

The Euro is drifting lower, but only marginally, as the market awaits the result of trade talks between Brussels and Washington.

It fell to a low of 1.1555 last week and closed at 1.1626.

Have a great day!