It has been a busy week in the UK, with the Autumn Statement dominating the headlines, while Bank of England governor Andrew Bailey continued to reiterate his “higher for longer” messaging on interest rates
It’s been a lot quieter in the US due to the Thanksgiving holiday, but the calm won’t last long, not least as we look to the Presidential election in 2024.
The UK Chancellor, Jeremy Hunt, delivered his “Autumn Statement for Growth” on Wednesday, with plenty of headline grabbing policy initiatives as the government seeks to bolster economic growth and their chances of being re-elected at the next general election, which looks likely to be this time next year. The Chancellor cut National Insurance by two percentage points and made permanent tax relief on business investment. Hunt claimed that the UK economy was “back on track” and that the package of tax cuts would boost growth without threatening the downward trajectory of inflation.
The Office for Budget Responsibility (OBR) noted that the tax cuts would over the next five years be eclipsed by the “fiscal drag” of frozen income tax thresholds taking more taxpayers into higher tax bands, which will deliver an additional revenue of £59 billion for the government by 2027-28 per the updated OBR forecasts. This brings the overall tax burden increases over the next five years to a post WWII high of 38%. The OBR upgraded its growth forecast for 2023 from -0.2% to +0.6% but downgraded 2024 from +1.8% to +0.7%. Over the next five years, the OBR sees the measures announced in the statement contributing 0.3% to output but also notes that household disposable incomes will not recover to their pre-pandemic levels until 2027-28. Hence, it won’t be easy for the government to create a “feel good” factor amongst voters in the next 12 months. The overall messaging in the statement was highly political as the government highlighted the more positive economic growth forecast for this year, halving of inflation and (slight) reduction in debt over the forecast horizon. Depending on the state of the economy in the Spring, the Chancellor may yet have further scope for pre-election sweeteners with the Budget, but if the opinion polls are anywhere near accurate, the government still has a lot of work to do to secure another term in office.
In various speeches this week, we have once again heard central bankers attempting to keep a lid on investors’ expectations for interest rate cuts in the near future. Andrew Bailey, Governor of the Bank of England, said on Monday that rates may need to rise again, with food and energy costs still posing an upside risk to inflation. He said it was too soon to begin thinking about rate cuts, with services inflation “much too high” and wage growth still “elevated”. He said the Monetary Policy Committee’s (MPC) projections “indicate that monetary policy will likely need to be restrictive for quite some time yet”. Speaking to MPs on Tuesday, Bailey said investors were putting “too much weight” on recent data that showed a sharp fall in inflation in October, saying “we are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2% … and I think the market is underestimating that”. Market pricing is currently for 70 basis points of rate cuts in 2024, with the first rate cut in June. The European Central Bank President Christine Lagarde cautioned it was “not the time to start declaring victory on inflation” but markets think their work is done, with 99 basis points of rate cuts expected next year.
Yesterday saw the US celebrate Thanksgiving and the date serves as a reminder that we now have less than 12 months to go before the Presidential election, which appears set to see a re-run of the 2020 election, with Joe Biden facing Donald Trump on 5 November 2024. This will be the first time the same two candidates have fought consecutive elections since the 1950s, and while both Democrats and Republicans will not formally choose their candidates until next summer, anyone other than Biden or Trump taking their party’s nomination would be a surprise. Of course, there is the small matter of Donald Trump’s legal issues still to be resolved, but these have not impacted his appeal to Republican voters, and in theory, convictions may not stop him taking office, though many lawyers and constitutional experts will likely be spending plenty of time arguing this point.
The 2024 election is expected to be an extremely close contest. It would be unwise to read too much into polling this far out from the election, but it appears clear that there is very little between the two candidates, and recent polls in the key swing states suggests Donald Trump is slightly ahead. Bear in mind that the US electoral college system that elects the President means that the election will come down to a small number of votes across five or six “swing states”. The 2020 election may have seen 160 million votes counted, but the election really came down to about 65,000 votes in five states. Polling also shows both candidates to be deeply unpopular both inside and outside of their own parties and this opens the door for other candidates to run in the election as independents. While they may not get anywhere close to victory, the votes they take from Biden or Trump could swing the election in favour of one of them.
The US economy is another key factor. History shows Presidents that have suffered a recession in the two years preceding the election do not get re-elected. The US economy is still in reasonable shape, but that is not reflected in President Biden’s very low approval ratings, with Trump consistently favoured in polls on who is trusted more on the economy. The Biden administration has been very generous in recent months with various policies aimed at keeping consumers in decent shape; this spending has certainly helped the US economy avoid the slide into economic stagnation we are seeing in this side of the pond, for now at least. However, the fuel for the US consumer in the past few years — the excess savings built up during the pandemic — now appears exhausted for the majority of households. 70% of US consumers are living from pay check to pay check — that’s a huge number of voters.
If Biden were to win, we would expect more of the same — more policies aimed at a green transition, policies aimed to rebuild US manufacturing and continued leadership on the global stage. A victory for Trump would see more populist policies, and the US acting alone and in its own self interests. Geopolitics will no doubt be affected, not least the war in Ukraine, and Trump’s threat to impose 10% tariffs on all imports would have a considerable impact on global trading relationships. Both sides will need to face up to the fiscal realities that a decade or so of quantitative easing and low rates have allowed US politicians to ignore. The national debt has ballooned under the Trump and Biden administrations and the size of the US debt and the cost of servicing it, along with maybe some discipline imposed by the bond market, may well see the next US administration forced to focus on fiscal restraint.
2024 is set to be a busy year of elections around the world, but as we look forward over the next 12 months, the US election will likely be the most divisive, and also the most consequential for global economics, politics and financial markets.
Have a good weekend,
Regards,
Anthony.
