 Junior doctors had been offered a 22.3% pay rise to end strike action. Train drivers have been offered a 15% settlement, teachers and nurses have been offered a 5.5% settlement. Such spending on public sector pay will not easily be absorbed into more restrictive fiscal targets from The Chancellor..
In 1948, Aneurin Bevin was asked how he had achieved an accommodation with doctors in the creation of the National Health Service. He explained he did it by “stuffing their mouths with gold”. A generous pay award and the right to treat private patients as a sideline helped. Starmer and Reeves appear to be using the same technique to resolve conflict in the public sector. “Stuffing Their Mouths With Gold’, with generous pay awards. More savings on spending, or higher taxes will have to be found to pay for the awards. Even the triple alliance of the big three taxes may be at risk at the onset of the new Labour Five year term. Only a quarter of voters believe that Labour’s public sector pay deals are affordable, according to recent polling for The Times. YouGov polling suggests only a third of voters think the party has handled the problem well. Almost 40 per cent of those questioned said the government had handled the issue badly, including 15 per cent of those who supported the party at last month’s election. A quarter of voters said they thought the deals would make future strikes more likely, while a third said Labour was too close to the trade union movement. Only 22 per cent said that the party had got the balance right. The government is preparing to publish its long-awaited workers’ rights package when parliament returns next month amid concerns from business leaders that it will strengthen the hand of the unions and raise costs for companies. The Federation of Small Businesses has warned confidence among small business owners fell back into negative territory in the second quarter of the year, largely due to higher private sector wages. The Trades Union Congress (TUC) is expected to press Labour for “pay restoration”, to make up for a decade of public sector real-terms salary cuts, when it holds its annual conference next month. Economists estimate that each one percentage point rise in the public sector pay bill would cost taxpayers about £2.5 billion. To restore public sector pay to the 2011 level in real terms would theoretically require a 21 per cent increase, of more than £50 billion. The survey found that despite worries about the cost, a majority of people were in favour of ministers agreeing pay deals to end the strikes. Just over 40 per cent said the 14 per cent three-year pay deal for train drivers was the right thing to do, while 38 per cent insisted it was wrong. The 22 per cent deal offered to junior doctors was backed by 57 per cent of voters but opposed by 27 per cent. The Tories had budgeted for an increase of just 2% in public sector pay deals. The imposition of a pay cut in real terms was never really realistic. The hidden costs of low pay deals are huge. They include, strike action and disruption. Increased waiting lists in the NHS, low grades in schools and increased waiting times on platforms. Low pay results in low morale, high staff turnover, increased recruitment difficulties, high training costs and huge on boarding challenges. Stuffing their mouths with gold may appear to be an expensive solution. Stuffing their mouths with “suckanhock and wampum”, makes low pay deals too difficult to swallow leading to a greater increase in cost. References ... Suckanhock a dark-coloured kind of shell -money, Wampum a traditional shell bead. Only a quarter of voters believe Labour pay deals are affordable … The Times Rising Costs Sap Confidence of Small Business ... The Times
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 “There is a budget coming in October and it will be painful” , Starmer warns in a Downing Street speech this week …
This could mean the Autumn budget could be not so much a Happy Halloween event, but more a Horror Halloween event. More Tricks than Treats in prospect from the new Chancellor of the Exchequer. Rachel Reeves has already warned of difficult decisions and the need for tax rises in the October budget. The borrowing figures for July continued to be “above forecast” increasing the probability of tough decisions ahead. Borrowing in the first four months of 2024-25 totalled £51.4 billion. This is just £0.5 billion below the same period last year and £4.7 billion above the monthly profile consistent with the latest OBR forecasts. The OBR explains, the difference with the forecast profile in the July data, is driven by higher spending by government departments, as a result of strong growth in public sector pay. Receipts are broadly in line with profile in the year to date the OBR said. It looks as if the OBR forecasts for the year of £80 billion will be exceeded significantly. The running rate (year on year basis) suggests borrowing this year will be around £120 billion. The consensus forecasts for borrowing PSNB basis this year is around £106.4 billion well ahead of the OBR outlook in March of £80 billion. The Chancellor has strongly hinted there will be tax rises in the autumn budget as she promised to be "honest" about "difficult" decisions that lie ahead. The public had been "misled for too long" about the state of the country's finances. "There will be more difficult decisions" around spending, welfare and tax, she added, when asked whether people should be prepared for taxes to be increased in the autumn. Watch My Lips No Increase in Major Taxes … During the election campaign, Ms Reeves promised not to increase major taxes on national insurance, income tax and VAT. But there was speculation that Labour could target other taxes, including capital gains tax, inheritance tax and employers national insurance charges. No increase in the levels of income tax allowances would mean the “fiscal drag” bonus would continue. The Tory cut in National Insurance charges may be reviewed following the assessment by the Prime Minister ‘Things are worse than we ever imagined. Speaking at a press conference shortly after announcing a series of spending cuts to make up part of a £22 billion funding shortfall, the Chancellor said … "The truth is we did not know about the £22 billion black hole this year when we went to the polls on 4th July. There will be more difficult decisions around spending, around welfare and around tax at the budget and the spending review later this year.” The chancellor announced a series of spending cuts, including cuts to the winter fuel allowance, which will now only go to those in receipt of pension credit. More cuts are expected in the budget along with the tax rises. More tricks, fewer treats in the Horror Halloween event. It’s going to be a cliff hanger … let’s hope it doesn’t damage the growth ambitions too much moving forward.  Britain’s economy received an upgrade from Wall Street this month. Official data showed another quarter of growth in the second quarter. Growth in Q2 was up by 0.9% year on year, following growth of 0.3% in the first quarter, according to official figures from the ONS, the Office For National Statistics.
Service sector performance pushed the economy higher, despite sluggish growth in manufacturing and a setback in construction. Bank of America raised its forecast for UK Gross Domestic Product (GDP) in 2024 from 0.8% to 1.1%. Optimism was also evident in the latest edition of Forecasts For The UK Economy published by HMT in August. The average forecast for growth this year increased to 1.1% from 0.9% prior month. Forecasts for growth in 2025 increased to 1.25%. The Bank of England was even more optimistic in the Monetary Report this month. Growth is expected to be 1.25% this year, easing to 1.0% next. Perhaps the Bank is more concerned about the autumn budget than others, but more on that later. For the moment, the growth estimate of 1.1% is fair value. This will require a significant improvement in the performance of the economy in the second half of the year. The latest Flash UK PMI Composite Output Index at 53.4 this month up from 52.8 in July, is supportive of the growth upgrade but it won’t be easy. The latest data in general was a case of the good, the bad and the ugly. Growth figures were good, inflation data casting a note of caution. The borrowing figures were challenging, causing deep concern amongst Treasury watchers ...  Starmer's About to Inherit An Economic Boom ... Or Is He?
The Labour leader is beginning his premiership, with the best economic backdrop in years, according to Szu Ping Chan, writing in The Telegraph on Thursday. The article appeared following the release, by the Office for National Statistics (ONS), of the GDP monthly estimate, UK for May 2024. The U.K economy grew at double the pace predicted by economists in the month, in a boost for Sir Keir Starmer and Rachel Reeves. The economy expanded by 0.4pc on a month on month basis. This is the fastest pace in more than two years and double the 0.2pc expected by analysts, according to the Office for National Statistics. Better still, compared to previous year, (our favourite measure), the economy grew by 1.4%. The strong performance prompted economists at Goldman Sachs to upgrade their own growth forecasts. James Moberly, economist at Goldman, said: "We raise our annual GDP growth forecast for 2024 to 1.2pc. This is above consensus of 0.7pc and the Bank's forecast of 0.4pc." Barclays and Deutsche Bank also raised forecasts to 1.1% and 1.2% for growth this year, following the latest data. At The Saturday Economist, we are flagging a change in our expectations for the year. Assuming no growth month on month for the rest of the year, growth in 2024 will be around 1.2%, (last year's performance was so bad). We await a further month's data for June and the second quarter of 2024 to confirm the call. Forecasts for the year could be revised even higher if the growth spurt continues. Grant Fitzner, the ONS's chief economist, described the expansion as "buoyant", (but not gangbusters) adding other indicators of the economy suggested the recovery was gaining traction. Britain's services sector was the largest contributor to growth, with the sector expanding by 1.6 per cent year on year. Transport and distribution was up by over 7 per cent, professional services sector was up by over 4 per cent. Liz McKeown, director of economic statistics at the ONS, said: "Construction grew at its fastest rate in almost a year after recent weakness, with house building and infrastructure projects boosting the industry." Growth in professional services was also a bright spot for the economy both in May and since the start of the year. The ONS said May's growth was driven by a rise in "scientific research and development" as well as technical testing and analysis linked to the engineering sector." Mr Fitzner said: "It continues a reasonably buoyant trend that we've seen through the first half of this year. Some of that is a bounce back from the downturn from last year, but this is continuing into the second quarter." The Pound rallied closing at just under $1.30 on Friday. Markets appear confused by mixed messages from the Federal Reserve and the Bank of England for that matter. The TSE chart suggests this is an over extension in the short term, some short positions should be restored at the start of next week. We expect the Sterling rally to fade somewhat. Ten year gilt yields moved down slightly closing at 4.11 from 4.12. Two year gilts closed off five basis points in the week. It may not be a boom, but higher growth will ensure additional monies into the Rachel Reeves coffers, allaying fears of tax hikes, perhaps ...  It's a Labour Landslide ... with just 34% of the vote ...
John Authers, senior editor for markets at Bloomberg summed it up, "I wouldn't vote for Labour, one of my favorite contacts in the City told me this week, but they aren't going to mess things up." This is the attitude permeating the UK's financial community. The mood for months has been the Conservatives deserved to lose power. It doesn't matter much, if Labour do win. They could hardly do much worse than the Tories Now the voters have spoken, taking the same attitude as the City perhaps. Casting ballots tactically, against the Tories. Labour's share of the vote didn't rise much but ... In the final count, Labour gained 211 seats, leading with 412 seats overall. The Conservatives lost 250 seats, entering the House next week, with just 120 seats. Lib Dems the big gainers with 63 new MPs and 71 seats in the lower chamber. Reform the big no show with just five seats at close of play. It must have been Ed Davey's bungee jumping which tipped the poll for the Lib Dems. Perhaps Nigel Farage, should have been at the end of a bungee rope. Many would have voted for that. In terms of share of votes, Labour scored 34%, Tories 24%, Reform 14% and the Lib Dems 12%. Interesting to note the combined Tory-Reform share was 38%, a four point lead over Labour. Lib Dems lower share of the vote, yielding many more seats that Reform. No wonder Reform advocate a first past the pub system. For the Tories, it was the end of an era. Many big names lost in the battle. Liz Truss, Jacob Rees-Mogg, Penny Mordaunt, Grant Shapps (Defence Secretary), Gillian Keegan, (Education Secretary) and Lucy Frazer (Culture Secretary. Jeremy Hunt clung on to his Surrey seat. The ex Chancellor, MP for South West Surrey since 2005, won the newly created seat of Godalming and Ash by around 1,000 votes after stiff competition from the Liberal Democrat candidate. Will he be the next leader of the Tory Party? Rishi Sunak has announced he will step down, once formal arrangements are in place to elect his successor. Sunak held 48% of the vote in the constituency of Richmond and Northallerton in Northern England. A staunch Tory seat, "they would elect a goat, if it had a blue rosette around its neck", it is said. For the Tories and the electorate, it has all been too much. Since 2016 there have been five prime ministers, seven chancellors, seven foreign secretaries, seven home secretaries, eight industry ministers and nine education secretaries. In 2022 alone, the country experienced three prime ministers, four chancellors of the exchequer, three home secretaries, three health secretaries, three industry ministers and five education secretaries. Since the implosion of the gilts market in 2022, it has been taken as inevitable the Conservatives would lose out in the election. The terrifying episode of rising rates, would ensure Labour would not attempt a big expansion of tax and spending plans in a dash for growth. Labour will take over, accepting the bond market won't let them do anything too expansionary or ambitious. Whatever Labour does next, it will be within the parameters set by the gilts market. That's why the City is so relaxed. So How Did The Markets React ? UK stock markets moved higher following news of Labour's election victory. House builders the biggest winners. Traders bet the new government's proposals to free up the planning system would allow developers to build more homes. Excitement curtailed, the FTSE closed at just under 8,200, down from the peak of 8,269 intra day. Ten year gilt yields closed at 4.13% drifting slightly over the day. Sterling closed up against the Dollar at $1.28 and up against the Euro at 1.08. The limited reaction in currency and bond markets reflected the fact the election result has been a foregone conclusion for a long time now. Starmer and Reeves have made it pretty clear they would play safe for now. The new Prime Minister stated in his speech. "Our work is urgent .. We begin it today". A lot to be done, we wish them well ... But The Bond Vigilantes Are Watching ...  The UK economy grew at a faster rate in the first quarter of the year, according to the latest update from the Office of National Statistics. Rishi Sunak hailed the growth figures as the "fastest growth in the G7." Growth is even better than "gangbusters", the excitable claim from Grant Fitzner, chief economist at the ONS, when the first estimate of GDP growth was announced in May. "The next Prime Minister is likely to inherit an improved economy" according to Jane Croft and Larry Elliott in the Guardian.
But will the economic revision be enough to save Sunak? I doubt that. Just four days before polling day, the Tories still trail Labour by 20 points in the polls but more of that later. First let's get the growth revision into perspective. GDP growth rose by 0.3% year on year according to the GDP Quarterly National Accounts released on Friday. The first estimate released on the 10th May, marked growth year on year at 0.2%. An improvement OK but not by much. Headlines react to the ONS statement which leads with growth rate quarter on quarter. At the end of the day, (make that the end of the year), it is the growth rate year on year which counts. Year on year, the performance was mixed. Manufacturing was up by 1.7%. Construction was down by 0.4%. Service sector growth was up by 0.4%. The transport and Storage sector was down 0.8%. Accommodation and Food, was down by over 1%. Don't break out the bunting just yet. Yes, the next prime Minister will inherit an improving economy. Growth could be as high as 0.5% in the second quarter. On track for growth of between 0.5% and 1.0% this year. It may well be Rachel Reeves that is the real winner. But the economy will need to grow at a much faster rate to allay fears over spending and borrowing Will It Save Sunak ... Just four days before polling day, the Tories still trail Labour by almost 20 points. The latest YouGuv survey has Labour on 36%, the Tories on 18%, just ahead of Reform at 17%. The Farage rally has fizzled out. Statements on Putin and Ukraine add the odd hint of racism and right wing extremism in the mix. Not for everyone, the economics of the tap room from a platform of the bar stool. In terms of seats, Labour could pick up over 220 seats in the house, with 425 MPs in the final count. The Conservatives would be left with just 108 seats, leaving Lib Dems with 50 plus and Reform with just five MPS. That's a big win for Starmer and a massive set back for the Tories. A growth rate of 0.3% is not enough to save Sunak ... That's all for now. Have a great weekend break ... Watch out for our update on the US election, the first debate described in the Telegraph, "not so much a debate more a medical emergency". Don't miss that!  Lots of economic data to add to the mix this week. Retail sales bounced back in May from a disappointing April. Month on month, sales volumes increased by 2.9% following a fall of 1.8% prior month. Year on year sales were up just 1.3% in volume terms, up 2.2% in value. The ONS warns data may have been affected by the extra bank holiday for the coronation of King Charles III.
If so, the loyal subjects were not drinking much, alcohol sales were down by 11.5%. Flag waving appeared to boost textile sales by 16.5%, footwear sales were up by 15%, cosmetic sales were up 11% and making music was up by 18%. We don't usually comment on the retail sales figures. I fear they are suffering from "Long Covid". Lies, damn lies and statistical adjustments part of the problem. Public Sector Finances ... The last update on Public Sector finances before the general election was released yesterday. Net debt edged up to £2.7 trillion pounds, that's 99.8% of GDP. Borrowing in the merry month of May, was £15 billion pounds. £33.4 billion for the first two months of the year, compared to £33.0 billion in the first two months last year. Borrowing is on track for another £120 billion this financial year, unless fortunes change for the new administration. Inflation Hits Target ... Consumer price inflation, CPI basis, hit the 2% target in May down from 2.3% in April. Goods inflation fell from minus 0.8% to minus 1.3%. Service sector inflation eased from 5.9% to 5.7%.Core inflation (excluding energy, food, alcohol and tobacco) increased by 3.5%. CPI inflation was expected to fall to target 2.0% in the second quarter, according to forecasts from the OBR and The Bank of England. The 2% target is not expected to hold. The Bank is concerned about the high level of service sector inflation and the high level of wage settlements. Producer prices appear to have "bottomed out". Our money supply model has also flagged the turn. The inflation arithmetic (goods and services) was 2.2% in the month. Inflation may have touched target in the second quarter. It's more of a "touch and go". Just like an aircraft, touching down on the tarmac and immediately taking off again. The Bank expects CPI inflation to increase and to average 2.5% in the final quarter. Bank Holds Rates ... Despite the headline inflation rate hitting the target, the Bank of England decided to keep interest rates on hold at 5.25%, reflecting ongoing concerns about persistent inflation in the services sector and the broader economy. "Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates." Analysts are divided on the timing of potential rate cuts, with some expecting reductions as early as August, while others anticipate delays until later in the year. For the moment, our overall forward guidance outlook is changing. We expect a series of two base rate cuts in the current year possibly beginning in August. We model base rates at 4.5% in the final quarter or possibly Q1 2025, but not much more to follow in 2025. But then again, don't bet on it ..  The Federal Open Market Committee (FOMC) decided to maintain the federal funds rate at its current level of 5.25%-5.5% at the June 2024 meeting. The decision reflects the Federal Reserve's cautious approach as it continues to monitor inflation and economic activity. Despite some signs of easing inflation, the Fed remains vigilant, emphasizing the need for "modest further progress" toward the 2% inflation target before considering significant rate cuts.
Inflation has shown signs of cooling, with the Consumer Price Index (CPI) for May at 3.3% down from 3.4% in April. However, core inflation at 3.4% remains a concern. Producer prices index eased to 2.2% last month, from 2.3% in April. Core prices, excluding food an energy held at 3.2%. The Fed is looking for more evidence of consistent data moving to target, before making any substantial policy changes. The Fed's decision to hold rates steady comes amid a robust economic backdrop, with strong job gains and low unemployment rates. Growth in the first quarter was up 2.9% year on year. Jobs growth in May was "very strong" with an increase of 272,000 jobs. In contrast, the unemployment rate increased to 4.0% in May from 3.9% prior month. Then, new weekly filings for jobless claims, unexpectedly spiked to 242,000 this week, a ten-month high, raising concerns about growth in the rest of the year. No wonder, the central bank remains wary of prematurely easing policy, which could risk reigniting inflation. Fed Chair Jerome Powell and other officials have indicated a preference for a "go-slow" approach to rate cuts, emphasizing the need for more data to ensure inflation is on a sustained downward path. The FOMC's latest 'Blue dot" projections suggest only one rate cut is likely before the end of the year, a reduction from earlier expectations of multiple cuts. While the FOMC has left the door open for potential rate cuts later in the year, the likelihood of significant easing remains low unless there is clear and sustained progress in reducing inflation. The Fed's cautious stance underscores its commitment to achieving long-term price stability before making any substantial policy shifts. Markets now expect just one cut this year, it could be as late as December. We would still consider two cuts a possibility, those blue dots do bounce about ...  Next week, it will be the turn of the MPC to make the big rates decision. The Bank of England's Monetary Policy Committee (MPC) is expected to hold interest rates at 5.25% at the upcoming meeting on June 20, 2024.
Will the MPC cut rates? Market expectations, based on overnight index swaps, suggest that August 3 is the more likely date for the first rate cut since 2020, with at least one more cut anticipated by the end of the year. While UK inflation has been falling, it remains a concern. As with the Fed, the Bank is cautious about easing monetary policy too soon, which could lead to a resurgence in inflation expectations. The latest data indicates that inflation CPI basis is expected to fall towards the 2% target but will rise again later in the year. The latest U.K. economic data suggests the economy expanded by 0.6% in April, year on year compared to growth of 0.2% in the first quarter. News headlines report growth was flat but that is month on month. We always use the year on year comparison. The unemployment rate increased to 4.4% from 4.3% in April. The number unemployed increased to 1.51 million, up 24,000. The number in work fell by 30,000. Vacancies fell by just 4,000 to 904,000. Earnings three month basis were steady at 5.9%. The single month data suggest earnings slowed to 5.5%. The housing market is slowing as fixed rate mortgages unwind but real earnings CPI basis increased to 3.6%. It's a mixed picture, which could suggest an economy at a turning point. Perhaps to soon yet to move ahead of the curve. The Bank of England will also consider the broader international economic environment. Recent growth has been stronger in the United States than in the euro area. Inflationary pressures have moderated somewhat but remain a concern. The divergence in monetary policy expectations between the US and Europe, adds complexity to the decision-making process. The upcoming general election on July 4, 2024, is a further factor. The Bank may prefer to wait until after the election to make significant policy changes. A new [Labour] government will change the economic landscape with new tax and spending plans and a few surprises. In summary, while there is some speculation about a potential rate cut in June, the consensus among market participants and analysts is the Bank of England will hold rates at 5.25% next week, with a more probable rate cut occurring in August and one further rate cut possible this year. As always we recommend a model scenario of base rates at 4.5% in the years ahead, no return to Planet ZIRP ...  The Tories face an extinction level event according to the latest YouGuv poll. Asked if there were a general election tomorrow, which party would you vote for, the Labour party claimed 40% of the vote compared to the Tories down to just 19%. Worse still the Reform Party, now lead by Nigel Farage polled 17% just two points behind the Conservative party.
Promising to reduce net migration to zero has wide appeal apparently. Reform policies and spending plans would appear to make Liz Truss as cautious as a fiscally prudent lettuce. Stop the Boats. Leave the European Convention on Human Right. Increase personal tax threshold to £20,000, raise the higher rate threshold from £50,270 to £70,000. Abolish inheritance tax, abolish VAT on energy bills. scrap VAT tourist tax,Increase defense spending to 2.5% of GDP by 2027 and 3% by 2030. Excise duties on beer under the cosh. The two point gap behind the Tories could be closed over this weekend. John Rental writing in the Independent suggests thatat least one poll is likely to show a “crossover” between Reform and the Tories in the next few days. "A headless chicken panic will strike the Conservatives when that happens." Perhaps that's why the Prime Minister abandoned his D Day landing to return to canvass in the UK. Sunak has since apologised for the misjudgement and mistake. A further example of miscalculation from the Tory leader in the election run up. The Labour party is heading for a two hundred seat majority in the house. 422 seats with the Tories down to just 140 MPs. The LibDems would still be the third largest party in the House of Commons. At the moment, no place in Westminster for Reform. Not even Nigel Farage is first past the post. |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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