Earlier this month we had the pleasure of hosting esteemed economist and keynote speaker Mark Berrisford-Smith, former Head of Economics at HSBC's Commercial Banking division for our client virtual finance event.
Following the recent UK budget announcement and the outcome of the US election, Mark provided insights on the potential impact on both the UK and global economies, as well as its implications for businesses. Below are some of the key highlights from the session, summarising Mark’s predictions and opinions on how businesses will be impacted by increased volatility in the US as a result of Trump’s reelection and a slowly recovering UK economy.
Trump's re-election sparks volatility
The re-election of Donald Trump as US President ushers in a new period of heightened geopolitical and economic uncertainty. The incoming Administration is committed to the mass deportation of undocumented migrants, the imposition of a general tariff on imports of 10-20%, and a programme of tax cuts and deregulation. While stock markets have been buoyed by Trump’s return, the bond markets are much more jittery, worrying that the new Administration will run the economy too hot, while applying political pressure on the Federal Reserve. If applied, as promised, higher tariffs (especially those threatened for China) will lead to higher inflation, thereby putting further interest rate cuts at risk, while also undermining global economic growth.
Reeves's budget: a gamble on growth
In the UK, the economy is now enjoying a modest recovery after last year’s very small recession. The recent Budget was always going to involve an increase in spending, on account of unfunded commitments by the outgoing Conservative government and the fact that previous forecasts implied unfeasible cuts to public spending later in the decade. Even so, the sums involved in Rachel Reeves’s first Budget were towards the top end of expectations, and haven’t gone down well in the bond markets, which will provide the vast bulk of the funding. In essence, the government has committed to spending around £70 billion extra in each of the next five years, covered by increased taxation of about £40 billion and extra borrowing of about £30 billion. Meanwhile, the new fiscal rules are a slight improvement on the old ones, but still provide inadequate discipline and accountability.
Bond markets face £297 billion challenge
The bottom line is that the bond markets are being asked to stump up £297 billion in the next financial year, compared with £277 billion this year. This is not just to cover the government’s anticipated deficit of £128 billion, but also to refinance past borrowings that are due for repayment. Quite apart from the unhappiness of businesses, which have been lumbered with paying higher National Insurance Contributions (NICs), the Budget could yet unravel if the bond markets take fright. The yields on benchmark UK government bonds should therefore be watched very closely, as these offer the best gauge of investor sentiment, and also have a bearing on fixed mortgage rates. By way of example, the yield on benchmark 10-year bonds is currently at around 4.5%, an increase of 0.2 percentage points since Budget Day and 0.6 percentage points since early August.
With the government committed to more spending, and with businesses likely to pass on most of the increase in their NICs to customers, inflation will start to creep up again in coming months. Matters are also not being helped by recent rises in gas and electricity prices, which means that the Energy Price Cap will be increased again, albeit by a small amount in January. The pace of interest rate cuts will therefore be slow, with no more reductions this year, and three at most in 2025. Nonetheless, now that the Budget is out of the way, the greater certainty about the taxation landscape for individuals and businesses should revive confidence in the months ahead. The pace of economic growth is therefore expected to accelerate to around 2% next year, barring no major geopolitical upsets or bouts of financial instability arising from actions taken by the new Trump Administration.
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