30 June 2025: How bad a first year has Labour had?

There are still several Labour Backbench MPs who are disappointed by the contents of the welfare reform bill that will be debated and voted upon in the House of Commons tomorrow. They do not believe that the compromise agreed with the Prime Minister goes far enough and may lead to a two-tier set of rules under which two people with the same disability are treated differently according to when they became disabled.

Sir Keir Starmer made a speech at the Welsh Labour Party Conference on Saturday in which he attempted to rally his Members of the cause of Labour’s core principles, but plenty still feel that hitting society’s most vulnerable runs contrary to what they believe.

While he appears to have ended the fear of a defeat for the Government tomorrow, seeing any number of Labour MPs joining the opposition colleagues in the division halls will be an embarrassment that could lead Starmer to make a Cabinet reshuffle sooner than he wanted.

The member of the Cabinet most at risk is Rachel Reeves, who is the architect of the welfare reform plans.

The opinion polls currently put Reform UK well ahead. This would be acceptable at the start of a Parliament, but the current Government and Cabinet should by now be using their vast majority to cement their term in office, with its popularity rising, not falling.

Sir Keir Starmer has made the most inept start of any prime minister in a century, a leading historian has warned.

Sir Anthony Seldon even suggested that Liz Truss, who lasted just six weeks in office before her MPs ousted her, did a better job than the Labour leader.

“Not in 100 years has anyone made such an inept start, coming into the role with so little idea about what he is doing and why he is doing it,” he told Sky News.

He needs to show people that he is Prime Minister, show people he’s got a story, show people things are getting better across the whole country with growth, and let that deal with Reform. Unfortunately, there have been some horrendously ill-considered decisions made, some of which have been reversed, like the pensioners’ winter fuel allowance. However, the changes to inheritance tax for farming families remain in place.

The constant blaming of the previous Government for the black hole in the economy created by unfunded policies was an “OK story” when told once, but the continued references to Rishi Sunak’s mismanagement of the economy during his term simply grate with voters.

And, now to make things worse, Reeves is faced with her own black hole, potentially created by her own colleagues on the backbenches.

There appears to be little doubt that taxes will be increased this Autumn; there appears to be almost no alternative, except for borrowing vast sums, which has already been ruled out.

Labour came to power with a credible message about fixing the economy and providing prosperity for years to come, but their message had a flaw in that there was no mention of just how tough the first few years would be for the very people who voted them into power.

The pound, having reached a four-year high of 1.3767 last week, was entitled to have a less positive day on Friday. It fell to a low of 1.3683 and closed at 1.3716.

One of the more annoying facets of President Trump’s constant tirades aimed towards Fed Chairman Jerome Powell is that his many suppositions are simply incorrect, and what is even more infuriating is that most of his Cabinet, including Treasury Secretary Scott Bessent, are aware of this simple fact.

Inflation is running at a rate that is above the Fed’s target. A target that has existed through every financial crisis since the mid-nineties, even if it was only formalised in 2012. It is a globally accepted benchmark that, while having little material reason to exist, serves as a reminder to the public of where price increases should be on an annual basis.

The enormous number that represents Government borrowing in the U.S. is something that does need to be addressed, and even Elon Musk was aware of this during his brief spell in the Cabinet. Simply borrowing more and more money each year, accompanied by the farcical pantomime where the Federal Government runs the risk of running out of money until the debt ceiling is inevitably raised, is unsustainable.

Anyone can see that just the threat of adding tariffs to the country’s imports of its most important natural resources and most valuable finished goods adds to the uncertainty that surrounds the economy currently.

The economy shrank by 0.5% in the period between January and March, which Trump no doubt attributes to his predecessor’s mismanagement of the economy. If the country falls into recession in Q2, should the contraction continue, he has a ready-made scapegoat in Powell.

Powell is far from alone in believing that interest rates should remain as they are and have been since the start of the year, given the level of uncertainty. The financial markets do not blame Powell for the Fed Funds rate remaining at between 4.25% and 4.50% since the dollar has suffered a bruising time since March.

Federal Reserve Bank of Cleveland President Beth Hammack said last week she sees no pressing need to cut interest rates when there’s still a lot of uncertainty about what trade tariffs will do to inflation, which is still above the Central Bank’s target. Given the resilience of the economy thus far, the risks from maintaining the current policy setting appear low, and I don’t see a weakening in the economy that would merit imminent rate cuts, though I remain attentive to that possibility.

On February 1st, the dollar index opened at 109.60, rose to 109.80, then began a collapse which saw it reach a low of 97.00 on Friday last week. Investors have even encouraged the ECB to talk about a “dollar crisis” as an opportunity for the single currency to be considered as a global reserve currency in the future.

This week will see the release of the employment report for June. The single most important piece of data for the economy has been relegated to a distant second as the President continues to use it as his personal plaything.

The U.S. economy shrank at a 0.5% annual pace in the first quarter of 2025 as President Donald Trump’s import taxes at least temporarily disrupted business, the Commerce Department reported on Thursday in a downgrade from its previous estimate.

First-quarter growth sank under a surge of imports, as companies in the United States rushed to bring in foreign goods before Trump could impose tariffs on them.

ECB President Christine Lagarde believes that risks to the economy are still skewed to the downside. This comment made to reporters on Friday has two connotations; first, the ECB President has added her weight to the view that the fight to lower inflation has been won, and second, that interest rates may well be cut again, certainly by the end of the year.

The ECB is hosting a forum on Central Banking beginning today, at which Andrew Bailey, Jerome Powell and host Lagarde will speak.

While Bailey and Powell have plenty happening in their economies to focus on, Lagarde has often recently felt the need to expand her choice of topic to include digital currencies and the opportunities that the current level of uncertainty is affording the Euro.

The ECB has been working for years on a digital version of the single currency, essentially an online wallet, but it needs the European Parliament to pass legislation, a step that has proven elusive amid resistance from lawmakers.

Lagarde will renew her plea in the European Parliament this week, describing the digital euro as key to Europe's financial autonomy and taking aim at competing, privately issued digital currencies known as stablecoins.

"A legislative framework to pave the way for the potential introduction of a digital euro should be put in place rapidly, please," Lagarde told a committee of the European Parliament.

The European Commission proposed digital euro legislation in June 2023, but not much has happened since. If the European Parliament passes the necessary law, the ECB's Governing Council hopes to vote on launching a digital euro in the autumn.

The Eurozone economy is suffering a crisis that is being reflected in investor confidence. Eurozone economic sentiment weakened unexpectedly in June, primarily driven by reduced confidence in industry and retail trade, a monthly survey data from the European Commission showed on Friday.

The economic confidence index fell to 94.0 in June from 94.8 in May. The score was forecast to rise to 95.1. The industrial confidence index posted -12.0 in June, down from -10.4 a month ago. The reading was expected at -9.9. This fall was driven by declines across all three components, namely managers' assessments of the current level of order books, stocks of finished products, and production expectations.

Due to deterioration in retailers' assessment of the volume of stocks and their business expectations for the next three months, the retail trade confidence index fell to -7.5 from -7.2. The consumer confidence indicator dropped to -15.3, in line with the flash estimate, from -15.1 in May.

By contrast, the services sentiment index rose unexpectedly to 2.9 in June from 1.8 in March. The expected reading was 1.6.

Similarly, fuelled by builders' employment expectations, the contractors' sentiment index improved to -2.8 from -3.5.

Among the largest EU economies, the ESI dropped most significantly in France, followed by Spain and Germany. Conversely, the ESI remained broadly stable in Italy.

The Euro has been likened to a runaway train which no one wants to get in the way of since February. It has risen from a low of 1.0207, where it appeared to be destined to test parity with the dollar, to a high of 1.1754. It is roughly the same distance from another long-term target, 1.20, and it is becoming apparent that traders’ fingers are hovering above the “sell button”, waiting for any encouragement to pull the trigger on short positions.

Have a great day!