9 July 2025: Labour’s wasted year

The Office for Budget Responsibility is reportedly concerned that the UK’s burgeoning level of public debt has placed the country in a vulnerable position.

In the first major assessment since the government’s two major U-turns, on disability benefits and winter fuel payments, last month, the Office for Budget Responsibility (OBR) has warned that recent attempts to shore up the Treasury’s balance sheet are in trouble.

One of the most serious issues facing the economy is the triple lock on the State Pension, which, if it remains in its current format, will soon become unsustainable.

Going forward, the cost of the triple lock could increase to nearly three times its original estimate.

The health check on the economy will raise further questions about the position of Chancellor, Rachel Reeves, who was in tears during PMQs last week as Sir Keir failed to guarantee her future.

It was only after the markets reacted badly to the uncertainty over who would run the Treasury that the Prime Minister publicly backed her.

A poll by YouGov, published earlier, showed that the government’s approval rating had plunged to -54, with just 13% approving, while 67% disapproved.

The decision to perform a U-turn and cave in to backbench rebels’ demands over welfare reform has turned a potential five billion pound saving into a small(ish) expense.

Meanwhile, the changes to the winter fuel payment will add a further one and a quarter billion pounds to the welfare bill.

Reacting to the OBR report, the Institute of Economic Affairs warned: “Two big changes are needed to turn things around. First, the state must become smaller and more efficient. Second, and related to this, productivity has to improve across the whole economy.

The question is whether Keir Starmer has the mettle to go against rebel backbenchers and drive the economy forward, despite him becoming more unpopular within the Party. The threat from the left wing of the Party is real and growing.

Starmer has shown enormous faith in his leadership team over the past couple of years, but they have badly misjudged the mood of the Party, and drastic steps may be needed if he is not to “go down with the ship”

It is estimated that within fifty years the national debt will have grown to 270% of GDP were policies remain unchanged for that extended period.

Between now and Autumn, Reeves will need to decide which of her pledges she is going to break. There is a lot less animosity about where funds will be raised compared to where they will be allocated. In her Budget last October, Reeves pledged that tax increases would be a one-off, in which all the bad news would be dealt with in one set of increases. She also promised that she would keep borrowing under control, with day-to-day spending covered by day-to-day income.

It may be a tumultuous three-month period at home, without even considering any unexpected shocks from abroad.

The pound lost further ground yesterday, falling to a low of 1.3562 and may well threaten its first support level at 1.3370. It recovered a little, closing at 1.3573.

Donald Trump renewed his verbal assault on Fed Chair Jerome Powell yesterday.

A pattern is emerging where, when Trump feels threatened or finds that his policies, particularly over the introduction of tariffs, are under pressure, he lashes out at Powell, blaming him, incorrectly, for the perceived malaise in the U.S. economy.

Were he to take a step back and acknowledge that the economic benefits of the introduction of tariffs would be wiped out by increased inflation and possibly higher interest rates, he would see that Powell and his colleagues on the FOMC are right in adopting a wait-and-see approach to monetary policy.

The extension of the pause in the implementation of tariffs on all but a few of America’s trading partners has simply increased the uncertainty that surrounds global trade currently.

The Trump administration's long road to trade deals with key partners raises the possibility that tariffs' ultimate impact on inflation will be pushed out, and that creates more uncertainty for Federal Reserve decision-makers.

Trump has threatened that an additional tariff of 10% could be introduced on imports from the BRICS (Brazil, Russia, India, China and South Africa) countries, and also from countries that support the loose affiliation.

South Africa's President Cyril Ramaphosa has opposed what he calls the "unilateral" higher trade tariffs imposed on his country by the US.

President Trump announced on Monday that he would subject imports from South Africa to a new 30% tariff from 1 August.

It is the only country from sub-Saharan Africa that Trump singled out in his announcement, reflecting his strained relationship with Ramaphosa's government.

In a letter to Ramaphosa, Trump said South Africa's trade relationship with the US "has been, unfortunately, far from reciprocal". In his response, Ramaphosa maintained that the 30% tariff "is not an accurate representation of available trade data".

Trump's decision is a huge blow to South Africa. The US is its second-biggest trading partner, and South Africa's automobile, farming and textile sectors had duty-free access to the US market under the African Growth and Opportunity Act (AGOA).

South Africa's Agriculture Minister John Steenhuisen said that while Trump was not explicit, his announcement suggested the end of AGOA.

"More than ever, it highlights the need for urgent reform in South Africa so we can ensure our economy meets the requirements of our trading partners around the world," Steenhuisen said in parliament.

While his relationship with the other BRICS nations is hardly friendly, he has singled out Ramaphosa following his recent visit to the White House, where he received close to what is being called “the Zelenskyy” treatment.

The minutes of the latest FOMC meeting will be published later, and they will be noted primarily for the level of support that exists for the wait-and-see policy on interest rates.

The dollar index appears to have set a bottom in place, although the mood in the market is still fragile. It rallied to a high of 97.83 yesterday, closing marginally lower at 97.50 as day traders closed out tentative long positions.

The Eurozone is about to be extended by the addition of Bulgaria to the fold.

It is a far more political than economic decision to allow the former communist state into the European Union, although the Bulgarian economy has performed admirably since it was ravaged by the Pandemic.

Bulgaria has been involved in various environmental protection initiatives and can contribute substantially to the EU's goals for sustainability and climate change mitigation, while it can provide a skilled workforce, particularly in fields like engineering, IT, and healthcare, which can help address labour shortages in other EU countries.

Bulgaria has a rich cultural heritage, including unique traditions, music, and cuisine. This diversity enhances the cultural tapestry of the EU, and its location at the crossroads of Europe and Asia provides strategic advantages for trade and security, particularly in relation to the Black Sea region and the Balkans.

Overall, Bulgaria's contributions to the EU will be multifaceted, encompassing cultural, economic, and geopolitical dimensions that enhance the union as a whole.

Structural reforms are a necessity for the German economy to grow again, German Economy Minister Katherina Reiche said yesterday in the lower house of parliament.

German business associations have criticised the new government's surge in public spending, which targets defence and infrastructure, saying it will not be enough to revive the economy unless it comes with structural reforms to boost competitiveness.

Europe's biggest economy contracted for the last two years, while the tariff threats by the U.S. President could deal it a major blow, possibly putting it on track for a third year of recession for the first time in post-war German history.

German exports fell in May as the reversal of a front-loading effect continued to impact the export sector, wiping out gains seen earlier in the year.

Exports decreased by 1.4% month-on-month in May, following a 1.6% decline in April.

This drop completely erased the surge in exports that occurred in February and March due to front-loading.

At the same time, imports saw a steeper decline of almost 4% month-on-month, which widened Germany’s trade surplus to €18.4 billion.

The United States remains the most important destination for German exports, despite this reversal and the threat of tariffs.

The effect of the introduction of tariffs could be devastating for the German Automobile sector, which has no other market the size of the U.S. to fall back on.

Trump’s introduction of tariffs, when taken in isolation, could be seen as directed at the sector, given German dominance of the U.S. luxury car market.

The Euro held its ground yesterday, managing to make a small advance versus the dollar. It reached a high of 1.1767, although it is now making lower daily highs, and closed at 1.1682

Have a great day!