8 January 2024: Tory MP’s critical of the OBR


  • OBR forecasts “underselling” the economy
  • The economy added 216k new jobs in December
  • Inflation rose to 2.9% last month
GBP – Market Commentary

Think Tank’s forecasts are “not supportive of decision-making”

A group of Government MPs have signed a letter to the Chancellor of the Exchequer which is fiercely critical of the role that the Office for Budget Responsibility plays in forecasting the economy, which has played a significant role in shaping Government policy.

Even if the forecasts for 2019 and 2020 are removed, given the unforeseen circumstances around the COVID-19 pandemic, the Way Forward Group estimates that the OBR has made forecasting errors which have totalled more than £120 billion.

Jeremy Hunt is under pressure to consider scrapping the Think Tank, which was set up by George Osborn to provide a central source of “scoring” for the effect of policy on the economy.

Former Home Secretary Suella Braverman gave an example of the flaws in the OBR’s forecasts recently when she spoke of the positive effect of migration policy noted in the data, but it doesn’t include the effect of such policies on education and health, two areas where the Government, based upon the OBR’s figures have been accused of underinvestment.

The forecasts for public sector borrowing have also been “wildly inaccurate” which has led to discrepancies in the amount of investment the Government can make in public services.

The monthly data for GDP is due for release later this week. It is expected to show that the economy grew by 0.2% in November, following a 0.3% contraction in October.

The country may well have entered a recession in the final quarter of last year, but with inflation expected close to the Government’s 2% target by Spring, allowing the MPC to begin to cut rates, any recession should be shallow.

Better news for both manufacturing and industrial output is expected from the data for November, although services output is still struggling to reach pre-Covid levels. With services accounting for around 80% of GDP, the economy may exit the recession early but is unlikely to be posting any significant growth before an election is called.

The Bank of England faces continued pressure to cut interest rates, but it will push back until the core rate of inflation has begun to fall considerably.

The pound was stable as the market returned after the Christmas and New Year Holidays. Last week, it fell marginally to a low of 1.2610 but recovered to close on Friday at 1.2720.

USD – Market Commentary

Hard for the Fed to cut rates while job growth remains strong

The U.S. economy continues to confound the expectations of those who believe that the economy may be facing a significant slowdown, possibly even a recession, later in the year.

216k new jobs were created in December, well above the market’s forecast of 170k. The figure for November was however revised down from 199k to 173k.

The unemployment rate remained unchanged at 3.7%, which is incredibly strong given the way interest rates were raised over the past year.

There was less impressive news about service output. Although services ISM is still in expansion, it came in at just 50.6 in December after a read of 52.7 in November.

While this may be a seasonal issue, the market will do well to consider the output data when estimating both GDP and employment data for January.

Inflation data is due for publication this week, and there is a chance that it saw a slight increase from November’s 3.1% to possibly 3.3%

The market expects core inflation to fall to 3.8% from 4% in November, in line with the Fed’s longer-term expectations.

The pressure on the Fed to cut rates will remain, but the market is likely to be content until the next FOMC meeting on February 1st to ramp up the pressure, especially if leading indicators show that the economy may be slowing down.

Given the fall in inflation over the past few months and the number of jobs that are still being created, Jerome Powell must now be credited with delivering the mythical soft landing for the economy.

It is open to doubt how long these “goldilocks” conditions will last, but for now, the Fed has achieved what was considered by many to be extremely difficult, if not impossible.

Following the release of consumer prices data on Thursday, producer price data will be published on Friday. This is expected to show a continuation of the fall in “factory gate” prices, which bodes well for future inflation.

The dollar index began its rally away from its medium-term support following a about of weakness in December as the market possibly misread the intentions of the FOMC.

The index rallied to a high of 103.10 last week and closed at 102.46

EUR – Market Commentary

A linear path for headline CPI is not a necessity for the ECB

Headline inflation in the Eurozone rose to 2.9% in December, following a major fall in November to 2.4%. It was made clear then that this size of fall was unsustainable, and the ECB’s Governing Council wanted to observe the trend for price increases over a longer period before deciding when to start to cut rates.

The only area of agreement between the market and the Central Bank is that rates will be cut this year.

The timing of any cut is still an issue, with the Eurozone economy likely to have already entered a recession which may be difficult to exit without rate cuts.

There was some better news from Germany, which despite its difficulties is still the region’s economic powerhouse. Although its Purchasing Managers Indexes are still in contraction, there was a significant improvement which points to better times ahead.

There is concern among some of the more hawkish Eurozone members that inflation may not be able to be brought down to the ECB’s target, given the current global outlook. It may well be that there may need to be an adjustment made to Central Bank targets, not just in the Eurozone, but across the entire G7 given the new outcomes that have followed in the immediate post-pandemic economy.

With core inflation now at a twenty-one-month low, the ECB can begin to look forward to a less pressurized 2024. However, it will still need to deal with several systemic issues, not least of all will be how to deal with the reintroduction of the Growth and Stability Pact and some kind of Fiscal Union.

It is important that Eurozone members voluntarily follow the rules on debt-to-GDP ratios and Budget Deficits. It is virtually impossible to give the rules sufficient “teeth” to be effective without the threat of the ultimate sanction, ejection from the group.

The Euro is lacking medium-term support as it, yet again, failed to hold onto gains which took it briefly above the important 1.10 level versus the dollar. It fell back to a low of 1.0876 last week but managed to attract a little short-term support and close at 1.0939.

A lot will depend on how G7 Central Banks deal with the continuing slowdown in output, and whether the market believes the ECB can continue to defy calls for a cut in rates to determine the medium-term fate of the common currency.

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.