23 November 2023: Sunak to face the election with a stagnant economy

23 November 2023: Sunak to face the election with a stagnant economy


  • NI contributions cut but tax burden on individuals stays
  • Soft landing? Two significant indicators still point to a recession
  • ECB to remain cautious about inflation, but Nagel sees a light at the end of the tunnel
GBP – Market Commentary

The OBR has slashed its forecast for the economy

As Jeremy Hunt was commending his Autumn Statement to the House of Commons yesterday, saying that the Government’s plan was working, but there is still a long way to go, the Office for Budget Responsibility was pouring cold water on his optimism by slashing its forecast for the economy.

The OBR halved its estimate for GDP over the next two years to 0.7% next year and 1.4% in 2025 from 1.8% and 2.5% in its earlier report delivered in March.

The fall in inflation is predicted to slow, only reaching the Government’s target of 2% in sometime in the first half of 2025, while interest rates will stay higher for longer, echoing the sentiments of the Bank of England

Although he cut national insurance contributions from 12% to 10%, providing around twenty-five million workers with an increase of approximately £450 per year, the overall tax burden will rise to 38% by 2028, its highest level since the second world war.

He supported the triple lock on pensions and benefits, meaning that pensioners will see an increase of 8.5% from next April while other benefits will rise by 6.7%.

Hunt believes that the economy has turned a corner in 2023, while the Opposition commented in response that it had hit a dead end.

The election that will be held in the next fourteen months will no doubt be fought with the economy as its primary battleground, and with the Chancellor now having laid out his plans for progress, it will be up to the Labour Party to come up with a fully costed alternative which will undoubtedly come under the severest of scrutiny by the OBR among others.

In its report, the OBR also had some unwelcome news for homeowners. It forecast that house prices would rise by an average of 0.9% this year but fall by 4.7% in 2024 as the effect of higher interest rates takes its toll.

The mood of the country is best summed up by the various newspaper headlines.

The right leaning papers were full of praise, commending the cut in NI contributions, the maintaining of the triple lock, help for renters and a freeze of duty on alcohol duty, while the left labelled the measures “more election bribes leading to more austerity”.

Changes to fiscal policy tend to be a “slow burn” for the financial markets, and yesterday’s announcements were no different.

Sterling fell to a low of 1.2449 versus a recovering dollar and closed at 1.2494, while against the common currency, it fell to a low of 1.1460 and closed at 1.1476.

USD – Market Commentary

Rates will only fall in the short term if the economy faces a recession

There is still a fear among a few Wall Street economists and commentators that despite the growing expectation that the Fed has engineered a soft landing for the economy, two significant leading indicators are still pointing towards a recession beginning before the Presidential election takes place next November.

The inversion of the yield curve and the continued fall in the index of leading indicators stay as a warning to the FOMC that its work is not done yet.

Although there has been a softening of Jerome Powell’s tone recently, he is still concerned that inflation is not falling at a fast enough pace.

Powell’s comment that risks are balanced between lower growth and higher inflation should not be taken lightly.

Were the drop in the rate of price increases to stall, or even reverse in the coming months, the FOMC may feel compelled to act and that would not only put a soft landing in jeopardy but could see the economy contract.

Given the level that interest rates are at, where they are in a neutral zone at best, but possibly already restricting demand, the Fed will need to not only act judiciously, but also choose its words carefully at its next meeting.

Although it will always be the market’s focus of attention, the November employment and inflation reports will be critical when they are delivered on the 8th and 14th of December, respectively.

It is likely that FOMC members will either have an advance warning of the inflation data or receive very accurate forecasts from their own economists prior to their meeting.

While there was a fairly muted response to the publication of the minutes of the last FOMC meeting, the market did take note of the likelihood that interest rates will stay “higher for longer”, a term that has become popular from G7 Central Banks recently possibly almost eclipsing “data dependence” in their lexicon.

The dollar index has reacted predictably to its fall to be near support levels. There was insufficient impetus being generated to test these levels, and a rally from here was always likely.

Yesterday, the index rose to a high of 104.21, but fell back to close at 103.87.

With today’s holiday to celebrate Thanksgiving, the market is unlikely to move too far from yesterday’s closing rates.

EUR – Market Commentary

The ECB believes that the economy is more resilient than the market believes

A call for fiscal reform appears to be the latest method being used by members of the ECB’s Governing Council to deflect the pressure that is still being applied by the market for rates to be cut or at least some sign of when they will start.

Joachim Nagel, the President of the Bundesbank is the latest Central Banker to suggest that the ECB is shouldering the burden of the economy alone.

Nagel spoke yesterday of his belief that interest rates are close to their peak if they haven’t peaked already and that the Eurozone economy is more resilient than the market believes, ruling out a hard landing.

He does not see the rise in interest rates as anything more than the natural reaction of a Central Bank to rising inflation, driven by an excess of demand over supply.

When asked if he was concerned that the stream of rate hikes were harming business, Nagel replied that inflation is falling and may allow the interest rates to follow at a suitably sensible pace.

He believes, as do most of his ECB colleagues, that inflation will fall to the Central Bank’s target of 2% over the next twelve to fifteen months.

There has been a significant shift in the political landscape from the usually moderate, liberal, Dutch electorate. It is estimated that far right politician, Geert Wilders’ anti-Islamist Freedom Party (PVV) will win 36 seats, well ahead of his nearest rival, a left-wing alliance.

The PVV is unlikely to win the 76 seats needed to win an outright majority, and they will need to moderate their rhetoric in order to persuade any of their rivals to join them in a coalition.

The result will send shockwaves around Europe as it follows a similar shift in Italy. It is a clear reflection of the concern over the lack of action that the European Commission is taking over illegal immigration, where responsibility is not shared evenly.

Christine Lagarde spoke recently about the stability of the Eurozone’s financial markets and her belief that risks are being dealt with “adequately”. Her view was challenged in a report published yesterday, in which high interest rates are being blamed for growing concerns about resilience and the likelihood that any further shock like another energy crisis could prove fatal for the Union.

The Euro appears to have reached a short-term peak. It fell again yesterday to a low of 1.0852 and closed at 1.0887. Short term support is located around the 1,0820/25 area which is likely to be tested, if not today, in the coming sessions.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.