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Rachel Reeves warned that cutting investment would damage ‘foundations of UK economy’ – business live


Introduction: Rachel Reeves urged to change fiscal rules to allow more investment

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

A group of leading economists are today urging chancellor Rachel Reeves to tear up the UK’s fiscal rules in next month’s budget, to allow the government to borrow more to fix the country’s public infrastructure.

In a letter published this morning, the group warn that under-investment has led to a “vicious circle of stagnation and decline” in Britain, weakening the economy and creating greater social and environmental problems.

Reeves, they fear, risks repeating “the mistakes of the past” by sticking with spending plans set by the previous government that imply substantial real-terms cuts in public investment over the current parliament.

They warn:

We do not see how the planned “decade of national renewal” can take place if these cuts are delivered.

To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability.

The letter is signed by Lord Gus O’Donnell, former Cabinet Secretary, Lord Jim O’Neill, former Commercial Secretary to the Treasury, professor Mariana Mazzucato of University College London, Mohamed El-Erian, former chief executive of Pimco, Sir Anton Muscatelli, chair of the Royal Economic Society, Professor Simon Wren-Lewis emeritus professor of Economics, University of Oxford, Professor Jonathan Portes, professor of Economics and Public Policy at King’s College London, and Professor Susan Newman, head of economics at The Open University.

The eight put their finger on the problem: The UK government’s current debt rules create an “inbuilt bias” against investment, by forcing ministers to show debt will fall as a share of the economy at a five-year horizon.

In their letter, published in the Financial Times, they say:

A more responsible approach, which better reflects the significant long-term benefits of increased public investment, will require changes to our fiscal rules and to the mandate for the Office for Budget Responsibility.

Reeves’s other fiscal rule is that government can only borrow to invest in capital projects, rather than to fund day-to-day spending, as she laid out in her Mais Lecture in March. That approach, the chancellor argues, will mark a break from a “short-termist approach that disregards the importance of public investment”.

The chancellor is expected to raise taxes, cut spending and get tough on benefits in October’s budget, having warned of a £22bn ‘black hole” of overspend by Whitehall departments.

But…O’Donnell, O’Neill, Mazzucato, El-Erian, Muscatelli, Wren-Lewis, Portes, and Newman warn that cuts to investment must be avoided.

They write:

In the upcoming Budget it is essential that the government recognises the important role that public investment must play in the decade of national renewal.

Further cuts to public investment must be avoided, a strategy for substantially increasing public investment adopted, and a process initiated to implement a pro-investment fiscal framework that focuses on long-term fiscal sustainability.

The agenda

  • 7am BST: Germany’s wholesale price index data for August

  • 10am BST: Eurozone trade data for July

  • 1.30pm BST: Empire State survey of US manufacturing

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Key events

The UK jobs market appears to have weakened slightly last month, which may nudge the Bank of England towards lowering interest rates.

The number of new job postings fell by 3.2% month-on-month in August, to 719,721, according to the latest Recruitment & Employment Confederation (REC) and Lightcast Labour Market Tracker.

The report shows there was a “sluggish start” to hiring in summer seasonal roles this year, before a late summer surge in hiring in tourism and hospitality.

REC chief executive Neil Carberry says:

“There is no doubt that the jobs market remains slow by comparison to previous years, with summer holidays also affecting the pace of hiring.

But there is little evidence of a sharp slowdown now.

Firms are waiting for a clear signal on growth plans and the timing of potential additional cost challenges from the new government before making investment decisions, which makes the Budget next month a vital moment.

BT had recruited a former top civil servant to its board, and given him the job of dealing with regulator Ofcom.

Sir Alex Chisholm, a former permanent secretary at the Cabinet Office, is joining BT’s board as an independent non-executive Director with immediate effect.

He will become BT’s designated non-executive director for engaging with Ofcom (who recently fined BT £2.8m for failing to give its EE and Plusnet customers clear contract information before signing them up).

Chisholm says:

“I am pleased to be joining the BT Group Board and I am looking forward to using the lessons and experience gained from my prior roles to contribute to the Board’s discussions and decision-making.”

Chisholm stepped down from the civil service, where he had also worked as chief operating officer, this spring. He’s already taken a psition as chair of energy company EDF.

Energy firm Ovo has announced a fresh £50m energy bills support scheme for the winter months.

Following the government’s decision to cut winter fuel payments for millions of pensioners, Ovo says more funding has been set aside to help cusomers.

It will fund a series of schemes, including direct financial support for customers struggling to pay their bills, temporary reductions in direct debit payments, one-to-one energy saving advice, and free or subsidised upgrades to people’s homes, including insulation, new boilers or heat pumps.

Mohamed El-Erian, one of the signaturies of today’s letter, is concerned that “open divisions” within the Labour Party on fiscal measures have distracted from the broader growth challenge facing the government.

Those divisions include the unpopular decision to begin means-testing the winter fuel payments, meaning many pensioners will lose the benefit.

El-Erian writes on Bloomberg that the government’s “encouraging start” is now at risk:

This is partly the result of the government having to deal with a fiscal inheritance from over a decade of Conservative rule that is worse than expected. It has been complicated by the decision to postpone the budget until October and the release of information on specific policy intentions (such as to cut winter fuel payments for pensioners) without the benefit of the government’s overall plans. Then there are the blunt fiscal rules that pay insufficient attention to different uses of funds and have arbitrary time horizons.

Don’t get me wrong. Fiscal prudence is a critical part of any long-term growth strategy. Yet its pursuit must be designed as an integral part of the growth mission and not a distant relative or, even worse, a separate endeavor.

The former CEO of bond-trading giant Pimco adds that the UK needs to “double down on releasing the brakes on current drivers of growth and promoting future engines”, adding:

The economy has a cyclical window to pursue the all-important secular growth mission with inflation down sharply and business sentiment on the way up. Failure to do so will make tomorrow’s fiscal conversation significantly more problematic while rendering even more elusive the high, inclusive and sustainable growth that so many need.

Advice piles up for Rachel Reeves

This morning’s letter is part of a volley of advice hitting Rachel Reeves’s desk before next month’s budget.

The Organisation for Economic Co-operation and Development has warned the chancellor that “significant action” is needed to stabilise the public finances.

That action could include scrapping stamp duty and reining in the pension triple lock, to help the government handle spending pressures from higher health, pension and climate change costs.

The Times reports:

The OECD’s researchers said that the “expensive” triple lock should be scaled back to increasing pension entitlements to an average of inflation and wages growth. At present, pensions rise by whatever is highest out of 2.5 per cent, inflation and pay growth. The International Monetary Fund similarly has recommended curbing the generosity of the triple lock.

The Resolution Foundation has called for Reeves to raise over £20bn through changes to capital gains tax, inheritance tax and national insurance in next month’s budget.

Resolution argued that its proposals would raise large sums of money while still meeting a “triple tax test” of making the system more efficient, ensuring the tax rises hit the better off, and not breaking Labour’s 2024 manifesto commitments.

Another UK takeover drama is grinding towards its climax.

Darktrace, the cybersecurity firm, will leave the FTSE 100 index on 1 October, after its shareholders accepted a $5.3bn takeover offer from US private equity business Thoma Bravo.

A timetable released this morning shows that the last day of dealings in Darktrace shares will be September 30, with its stock market listing set to be cancelled before 8.00am on 2 October.

Earlier this month, Darktraace announced that Poppy Gustafsson, the company’s co-founder and chief executive, will leave once the sale goes through.

US dollar weakens as markets anticipate large interest rate cut

The US dollar is weakening this morning as traders anticipate a big cut to interest rates across the Atlantic later this week.

The pound has gained half a cent to $1.3170, and the euro is up almost half a cent at $1.1115 – both one week highs.

The US Federal Reserve will set interest rates on Wednesday; this morning, the money markets indicate there’s a 60% chance that the Fed will take dramatic action and slash rates by half of one percent.

A smaller, quarter-point, rate cut is now only a 40% chance, having been odds-on last week.

Kathleen Brooks, research director at XTB, says the case is building for a large cut by the Fed:

The case for a 50bp rate cut boils down to two things: first, the economic conditions and second, the risk of the Fed falling behind the curve. The economic data is getting weak in the US. The Citi economic surprise index for the US is close to its lowest level since 2015, the labour market is cooling and there are signs of distress in the manufacturing sector, which has been languishing in contraction territory since April.

The Fed’s preferred measure of inflation, the core PCE index, has fallen from 5% in 2023 to 2.6% now, which is close enough to the Fed’s 2% target rate. An article in the Wall Street Journal on Thursday spurred speculation that the Fed may start big with its rate cutting cycle. It argued that a key consideration at the Fed is falling behind the curve and letting a soft-landing slip through its grasp.

The unemployment rate might be ticking higher, but at 4.2% it is hardly in recession territory. Likewise, the latest GDP estimate from the Atlanta Fed’s GDPNow tool, is predicting growth of 2.5% annualized for Q3, which would be the envy of Europe. There is an argument that why would the Fed risk a rapid rise in the unemployment rate by taking its time cutting interest rates?

UK car parts supplier TI Fluid rejects bid from Canada’s ABC Technologies

In the City, UK manufacturer TI Fluid Systems has rejected a takeover approach from Canadian rival ABC Technologies.

TI Fluid Systems, which makes products for vehicle manufacturers such as brake lines and fuel systems, has become the latest UK company to receive – and try to fend off – a takeover offer.

It told shareholders this morning it had received two “unsolicited, highly preliminary and non-binding” cash offers from ABC Technologies in recent weeks.

The second, received on 4 September, was worth 176p per TI share – a premium of 20.7% to the closing share price of 145.8 pence last Friday.

But, TI is urging shareholders to take no action, saying:

The Board of TI Fluid Systems considered the Proposal in detail with its advisers and unanimously concluded that it significantly undervalued TI Fluid Systems and its prospects, and accordingly the Proposal was rejected early last week.

The Board is confident in the strategy and prospects of the Company.

Shares in TI Fluid Systems have jumped by 12% in early trading, to 163p each.

Manufacturing yet to see lift off from Labour government

The introduction of the new Labour government has yet to result in an immediate boost in manufacturing performance but businesses are expecting greater political stability will drive better performance across the coming year.

Make UK, which represents 20,000 manufacturing firms in the UK, found that output decreased to -2% in the third quarter of the year, down from the 9% growth experienced in the previous quarter.

This was the first time output turned negative in four years. However, it did expect output to increase by 33% in the next quarter.

The survey of more than 300 companies found that six in 10 believed that the new government would lead to better economic growth in the next 12 months and only 6% of firms expected it to drop.

Fhaheen Khan, senior economist at Make UK, says:

“This quarter presents a tale of two halves with output turning negative and recruitment taking a dip, yet investment remains positive and business confidence continues to climb.

“With an autumn budget and spending review fast approaching, now is the time for government to pick up the pace and deliver on pre-election promises, most notably the publication of a long-term robust industrial strategy.”

Elsewhere in the economy, the gap in rents paid by those in the north and south of England has closed to its lowest level in at least 11 years.

In its latest monthly lettings index, the property company Hamptons reported that the average rent paid by tenants in the north of England in August was £960 a month, an increase of 9.6% compared with the same period last year.

This was 37% (£357) lower than the £1,317 that the average renter in the south of the country pays – the smallest percentage gap since Hamptons began publishing the index in 2013.

Even through the asking prices for UK houses are rising, it’s “paramount” that sellers price their property correctly when they put it on the market, warns property agent Emma Fildes of Brickweaver.

Being too greedy can be counter-productive, especially when buyers have more stock to choose from:

Spurred on by encouraging yet potentially misleading House Price Indices and a base rate cut, sellers hit the autumn market brimming with pricing confidence.  Average prices increased by 0.8% (+£2,974) this month to £370,759.
The number of agreed sales was also up, rising  27% on… pic.twitter.com/4SbMsJFDYR

— Emma Fildes (@emmafildes) September 16, 2024

Asking prices for UK homes rise sharply in September

Asking prices for homes in the UK are rising twice as fast as normal this month, as falling mortgage rates stimulate demand.

Property website Rightmove has reported this morning that the average price of homes coming to the market rose by 0.8% to £370,759 this month.

Prices usually rise in September, but this year’s increase is double the long-term average.

A chart showing average UK house asking prices Photograph: Rightmove

Rightmove reports that the traditionally busier Autumn market appears to have started early, as increased activity in the market encourages sellers to lift prices.

According to Rightmove, the number of sales being agreed is up by 27% year on year, with 14% more sellers in the market than a year ago.

That suggests that both buyers and sellers are seeing a window of opportunity, as mortgage rates have been trending down, and real wages have been rising this year.

Rightmove’s Tim Bannister says:

“The autumn action has started early with a strong rebound in activity from both buyers and sellers compared to the subdued market at this time last year, continuing the momentum from the better-than-expected summer market.

The certainty of a new government followed by the first Bank Rate cut in four years invigorated the market, opening a window of opportunity for movers to act. Some of this will be pent-up demand from those who had to hit the pause button until now. However, windows of opportunity tend to need a momentum of good news to stay open, and there are still uncertainties ahead which could cause some of the current market activity to ease.”

The Bank of England could give the housing market another boost on Thursday, when it sets interest rates. However, the City expect the BoE to leave interest rates on hold; there’s just a 30% chance of a rate cut this week.

Bloomberg explain why the eight economists want to change the mandate of the Office for Budget Responsibility:

The OBR currently operates with a five-year timeframe and a paper it recently released showed that the gains from infrastructure investment over that time horizon are reasonably small. Over a long time horizon, the investment starts to look much more attractive.

Economist professor Danny Blanchflower, a former member of the Bank of England’s monetary policy committee, is backing this morning’s letter:

Great letter happy to support also

— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) September 15, 2024

“The government has inherited spending plans that imply substantial real-terms cuts in public investment. We don’t see how the planned “decade of national renewal” can take place if these cuts are delivered, repeating past mistakes”

Me & others in FT: https://t.co/OnPZdSBqgp

— Jonathan Portes (@jdportes) September 15, 2024

The Treasury have told the FT said the chancellor “has vowed to lead the most pro-growth, pro-business Treasury in the country’s history”.

In response to this morning’s letter, the Treasury say Reeves has “set out her commitment to the current fiscal rules and will set out precise details at the Budget”.

Introduction: Rachel Reeves urged to change fiscal rules to allow more investment

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

A group of leading economists are today urging chancellor Rachel Reeves to tear up the UK’s fiscal rules in next month’s budget, to allow the government to borrow more to fix the country’s public infrastructure.

In a letter published this morning, the group warn that under-investment has led to a “vicious circle of stagnation and decline” in Britain, weakening the economy and creating greater social and environmental problems.

Reeves, they fear, risks repeating “the mistakes of the past” by sticking with spending plans set by the previous government that imply substantial real-terms cuts in public investment over the current parliament.

They warn:

We do not see how the planned “decade of national renewal” can take place if these cuts are delivered.

To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability.

The letter is signed by Lord Gus O’Donnell, former Cabinet Secretary, Lord Jim O’Neill, former Commercial Secretary to the Treasury, professor Mariana Mazzucato of University College London, Mohamed El-Erian, former chief executive of Pimco, Sir Anton Muscatelli, chair of the Royal Economic Society, Professor Simon Wren-Lewis emeritus professor of Economics, University of Oxford, Professor Jonathan Portes, professor of Economics and Public Policy at King’s College London, and Professor Susan Newman, head of economics at The Open University.

The eight put their finger on the problem: The UK government’s current debt rules create an “inbuilt bias” against investment, by forcing ministers to show debt will fall as a share of the economy at a five-year horizon.

In their letter, published in the Financial Times, they say:

A more responsible approach, which better reflects the significant long-term benefits of increased public investment, will require changes to our fiscal rules and to the mandate for the Office for Budget Responsibility.

Reeves’s other fiscal rule is that government can only borrow to invest in capital projects, rather than to fund day-to-day spending, as she laid out in her Mais Lecture in March. That approach, the chancellor argues, will mark a break from a “short-termist approach that disregards the importance of public investment”.

The chancellor is expected to raise taxes, cut spending and get tough on benefits in October’s budget, having warned of a £22bn ‘black hole” of overspend by Whitehall departments.

But…O’Donnell, O’Neill, Mazzucato, El-Erian, Muscatelli, Wren-Lewis, Portes, and Newman warn that cuts to investment must be avoided.

They write:

In the upcoming Budget it is essential that the government recognises the important role that public investment must play in the decade of national renewal.

Further cuts to public investment must be avoided, a strategy for substantially increasing public investment adopted, and a process initiated to implement a pro-investment fiscal framework that focuses on long-term fiscal sustainability.

The agenda

  • 7am BST: Germany’s wholesale price index data for August

  • 10am BST: Eurozone trade data for July

  • 1.30pm BST: Empire State survey of US manufacturing

Share

Updated at 





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