Week of 3rd September-10th September: UK Wage Slump, International Policy Moves, and Escalating Conflicts Shape the Week
The week of September 3rd–10th saw important events in the global economic and political environment, including substantial updates on inflation, labour markets, and key political actions in the UK.
Section 1: UK:
UK Wage Growth Slows, Labor Market Weakens, UK State Pension Set to Rise:
Wage growth in the UK slowed in the three months preceding up to July. According to the Office for National Statistics, annual pay growth (excluding bonuses) decreased to 5.1%, down from 5.4%. Payroll employment also fell, with 6,000 positions lost in July and 59,000 in August, as well as a decrease in vacancies. This could mean that the second half of the year may decline in GDP growth due to weaker wage growth, supply constraints, and high interest rates (now at 5%).
The wage data will impact next year's state pension increase, which could jump by £460 based on current 4% wage growth. Pensions are predicted to expand faster than working-age benefits, which will be boosted by consumer price inflation of 2.1%.
The unemployment rate remained low. The labour market sent mixed signals, with unemployment decreasing to 4.2% but job vacancies reducing, indicating a decrease in worker demand. Additionally, productivity remains a problem, despite other economic data showing recovery.
Labour's Winter Fuel Cut Faces Internal Revolt: Starmer's Leadership Tested
Labour leader Sir Keir Starmer has come under fire within his party over plans to reduce £1.5 billion in winter fuel payments for pensioners. Ten Labour MPs have signed a motion seeking a delay, while party figures such as Lord David Blunkett have voiced strong opposition. The cut would affect ten million pensioners, raising concerns ahead of a Commons vote next week. Chancellor Rachel Reeves claims the changes are required to overcome a £22 billion fiscal deficit, but the decision has alarmed many Labour MPs. Starmer will be tested as opposition parties, particularly the Conservatives and Liberal Democrats, utilise internal splits on this subject.
Despite efforts from the Labour leadership, Duncan-Jordan refused to withdraw the motion. The upcoming vote is unlikely to change the government's decision; however, a rebellion would undermine Keir Starmer's power.
Interest Rate and Inflation:
The Bank of England is likely to announce a potential rate drop soon, prompted by recent inflation and economic data. Market estimates are expecting the rate to decrease to 4.5% or lower, following a peak of 5% earlier this year.
As the next Bank of England Monetary Policy Committee meeting approaches on Wednesday, followed by an announcement on Thursday, it appears that there will be no more interest rate decreases in September. Current market consensus keeps the base rate at 5%, with economists predicting a cautious posture from the BoE following its latest decrease on August 1. At 5%, UK interest rates are the highest among major Western countries, leaving some room for further cuts in the future. However, doubt prevails about how the Bank of England will strike a balance between inflation and economic development.
Inflation has been a major concern, with recent numbers showing a drop at the Bank of England's objective of 2% but then rising again to 2.2%, mainly due to rising domestic energy prices. Core inflation, excluding food and energy, stays at 3.5%, indicating that service prices continue to rise. With wage and unemployment statistics pending and the next inflation report scheduled for September 18, the Bank of England is expected to retain its strict monetary policy to keep inflation under control. While markets expect another rate cut later this year, perhaps in November, the Bank of England has advised against lowering rates too soon or too much.
Tax:
HM Revenue & Customs, has relaxed the restriction on owning fractional shares in tax-free Individual Savings Accounts. This change is designed to stimulate more stock investment by allowing investors to hold partial shares in their ISAs, which many trading apps currently enable.
The House of Lords Economic Affairs Committee has advocated for stricter public debt rules, claiming that the current system is too readily manipulated. They propose a new fiscal framework that ensures the debt-to-GDP ratio falls steadily over five years, (rejecting the present approach of allowing debt to climb for four years before forcing a minor reduction).
This advice comes ahead of Chancellor Rachel Reeves' next budget, which is expected to include revisions to fiscal laws. She has announced plans to include a "tax road map for business" in the forthcoming budget on October 30. This plan will contain Labour's vow to cap corporate tax at 25%. The strategy intends to maintain a steady investment climate in the face of predicted tax rises for firms. Reeves' plan also calls for future capital gains tax increases, as well as greater taxes on private equity and the oil and gas sector. However, an increase in the windfall tax on oil and gas corporations may have an impact on investment, with the UK economy facing possible losses of £13 billion between 2025 and 2029.
The proposed changes to taxes are viewed as a danger to the UK's appeal for company investment and risk-taking. Capital gains tax, now at 20%, and carried interest, taxed at 28%, may rise, affecting both venture capitalists and private equity managers. Venture capitalists believe that higher taxes on carried interest and capital gains will harm their business model and force them to relocate. This may be the reason why so many businesses are relocating to countries where tax is more lenient for high-income earners. Could this cause the inverse of economic growth? By driving away fundamental businesses, the UK may suffer in the long run.
The UK venture capital sector, a major participant in Europe, raised $21.3 billion last year, with the majority of money coming from outside Europe. Investors warn that raising taxes may reduce the UK's competitiveness in comparison to other countries, increasing their attraction to high-income earners and entrepreneurs.
UK Aims to Lead G7 in Coal Exit: Final Power Station to Shut as Green Energy Surges:
The UK wants to be the first nation among the G7, ahead of Canada and Germany, to abandon the use of coal as a source of electricity. The UK is shifting its energy mix away from coal, which accounted for 80% of the country's energy in 1990, to more sustainable sources like solar and wind, both of which have risen dramatically.
The UK's final coal-fired power station, Ratcliffe-on-Soar, is scheduled to close its doors at the end of September as part of the country's efforts to decarbonise its electricity supply by 2030. The nation's resolve to lower carbon emissions and achieve its net-zero objective by 2050 has advanced significantly with this.
Health and Social Care Secretary Outlines Key Reforms for NHS Future: Community Care, Digital Shift, and Prevention Focus:
The future of the NHS requires three significant changes, according to UK Health and Social Care Secretary Wes Streeting: transferring care from hospitals to the community, switching from analogue to digital technology, and emphasising prevention over illness treatment. Modernising the NHS, early diagnosis, and relieving hospital strain all depend on these reforms. To solve the issues of an ageing population and lengthy waiting lists, Streeting underlined the significance of social care and cooperation between the NHS and life sciences. He asked people to be patient for longer-term reforms while addressing pressing challenges.
US and UK Seek Indefinite Extension of Mutual Defence Agreement Amid Global Nuclear Threats:
Last but not least, the US and the UK want to keep their Mutual Defence Agreement (which controls technology sharing for their nuclear weapons programs) in place indefinitely. This extension, which takes the place of the previous 10-year limit, is a reflection of the rapid spread of nuclear weapons worldwide, especially by North Korea and China. To ensure long-term collaboration and support for their nuclear deterrents and military obligations, the move needs legislative approval in both nations.
Section 2: Global Overview:
United States:
Election:
According to recent updates on the 2024 US election, Kamala Harris and Donald Trump are preparing for their first presidential debates. Harris has begun advertising criticising Trump's record and has advocated for more taxes on the affluent and major corporations, which would include childcare tax credits and incentives for small businesses. She also argued for measures to decrease everyday costs, such as controlling insulin prices and tightening down on price gouging, despite some economists' reservations about price restrictions.
Meanwhile, Trump is focusing on crucial subjects like marijuana legalisation in Florida and his support for federal marijuana reclassification. Trump called for lower taxes, reduced government expenditure, and an aggressive deregulatory agenda, with Elon Musk assisting in the elimination of regulations. He emphasised increasing US energy production to reduce fuel costs and promised to continue his 2017 tax cuts while slashing more levies to combat inflation and drive the economy. However, many economists question the efficacy of his initiatives. Both campaigns are making final efforts to target key voter groups. The debate is viewed as a high-stakes event that could alter momentum for either side.
Bangladesh:
The United States will begin economic negotiations with Bangladesh's interim government, led by Nobel laureate Muhammad Yunus, on September 14-15 in Dhaka. This is the first high-level economic engagement between the United States and Bangladesh since former Prime Minister Sheikh Hasina was ousted by a student-led revolution.
US seizes Venezuelan aircraft:
The US Department of Justice has confiscated Venezuelan President Nicolás Maduro's private jet, alleging violations of US export controls and penalties. The aircraft was confiscated in the Dominican Republic and transported to Florida. The Department of Justice believes the $13 million plane was purchased through a shell corporation and unlawfully exported from the United States before being utilised by Maduro and his allies for foreign travel.
Federal Reserve Watch: Interest Rate Cuts in Focus:
U.S. Federal Reserve Chair Jay Powell suggested that it may be time to change monetary policy, indicating that future rate decreases will be determined by economic statistics. For example, recent CPI may impact Fed interest rate decisions. With inflation currently at 2.5%, a low inflation reading could prompt more aggressive rate cuts. Furthermore, slowing job growth in the United States has raised predictions of an impending rate decrease. Despite this, markets reacted moderately, with bond yields and the US currency falling slightly.
Eurozone:
ECB Likely to Cut Rates as Inflation Falls:
The European Central Bank is expected to announce a 0.25 percentage point rate drop at its meeting on September 12, the second since beginning its rate-down cycle in June. The low inflation report strengthens the European Central Bank's prospect for another rate drop.
Mortgage lending in European banks is anticipated to remain flat this year due to increasing interest rates, following a period of record low rates.
EY predicts that mortgage lending will return after 2025, with growth of 3.1% in 2025 and 4.2% in 2026 as borrowing costs fall and inflation slows. Business and consumer credit are also predicted to get better, with business lending increasing to 4.2% and consumer credit reaching 4.2% by 2026.
Spain Appoints José Luis Escrivá as New Bank of Spain Governor and Emmanuel Macron has nominated Michel Barnier for prime minister of France:
Spain has named José Luis Escrivá as the new governor of the Bank of Spain, filling a three-month vacancy. This decision, announced by Economy Minister (Carlos Cuerpo) is contentious since it goes against the established process of securing an agreement between the administration and the conservative opposition, potentially making Escrivá appear biased. The nomination breaks with the 1994 tradition of bipartisan consensus on central bank leadership, but it is permitted without parliamentary approval.
Emmanuel Macron has nominated Michel Barnier, the former EU Brexit negotiator, as France's prime minister amid a divided political environment. Despite previous critiques of Macron, Barnier's significant political experience is viewed as a plus in negotiating the current political deadlock. His key responsibilities will be to develop consensus, manage economic concerns, and pass the 2025 budget. Barnier's ability to stabilise the government will be widely watched, as his actions might have a huge impact on France's political destiny.
Asia:
China’s Economic Stimulus Measures:
Investment banks have lowered their growth projections for China, concerned that the government will fail to fulfil its declared aim of roughly 5% GDP growth. Analysts point to ongoing problems, such as a failing housing market and the possibility of deflation, as reasons why China may miss its growth target again this year.
China is seeking to lessen its reliance on US dollars for trade, to increase its influence and lower currency risk. In July, the Chinese Yuan accounted for 53% of Chinese commercial transactions, up from 40% three years prior. This growth is due in part to increased trade with Russia, which avoids US dollars due to sanctions, as well as more currency exchange agreements with nations such as Saudi Arabia, Argentina, Mongolia, and Brazil. Saudi Arabia, China's primary oil supplier, is collecting Chinese Yuan but prefers to exchange it for dollars and euros. China has also intervened in currency markets to maintain the Chinese Yuan’s exchange rate against the US dollar. Despite these efforts, the renminbi currently accounts for fewer than 5% of worldwide transactions.
The Rise of the Middle East:
Saudi Arabia and the UAE are making significant attempts to diversify their economies and increase their geopolitical influence. Saudi Arabia's Vision 2030 aims to reduce reliance on oil by expanding foreign direct investment and encouraging non-oil exports. Meanwhile, the UAE has embraced artificial intelligence, establishing the world's first Ministry of AI and bringing AI into education through initiatives such as the introduction of GPT-powered personalised tutors for all students.
Both countries' foreign policies have focused on regional stability. Saudi Arabia has resumed diplomatic relations with Israel, Iran, and Yemen. Despite the ongoing Israeli-Hamas conflict, the region's efforts to influence its destiny through diplomacy are likely to continue.
Geopolitics:
Israel-Hamas war:
Despite massive public outcry and pressure from foreign mediators, Israeli Prime Minister Benjamin Netanyahu has refused to compromise on a cease-fire or hostage deal with Hamas. In an aggressive press conference, he emphasised the need to retain military control over the Philadelphi corridor on Gaza's border with Egypt, claiming that it prevented Hamas from importing weapons. Despite demands from US President Joe Biden to be more accommodating, Netanyahu maintained that continuing pressure on Hamas is required to obtain concessions. The Israeli cabinet has supported his position.
The Israel-Hamas conflict has seen significant combat over the last week. The United Nations has condemned Israeli bombings in Gaza for killing at least 40 civilians in Khan Younis, which was designated as a safe zone. Israeli Defence Minister Yoav Gallant declared that Hamas' military capabilities had been significantly weakened, despite the fact that the group continued to engage in guerrilla warfare. Mediators from the United States, Qatar, and Egypt are failing to arrange a ceasefire, although the conflict has already claimed over 40,000 lives.
Russia-Ukraine Conflict Escalates:
A Russian missile attack on Poltava, Ukraine, killed at least 51 people and injured more than 200. The rockets hit an educational institution and a local hospital, causing extensive damage. This is one of the bloodiest attacks since Russia launched its full-scale invasion in February 2022. President Zelenskyy has asked for a full inquiry and immediate assistance from Western partners, especially long-range weapons, to help Ukraine fight such attacks. Ukrainian officials and residents have criticised the government's preparations and response to the attack.
Conclusion:
In summary, the week of September 3rd to 10th saw significant economic and political changes around the world. The UK labour market sent contradictory signals, with slowed wage growth and fewer job openings, while internal Labour Party debates showed difficulties over proposed cuts to winter heating subsidies. The Bank of England's cautious attitude on interest rates in the face of shifting inflation and economic conditions continues to be a significant focus. On a worldwide scale, the United States and the United Kingdom attempted to expand their mutual defence treaty, and significant alterations in economic policy were observed in Europe and Asia, including revisions in tax legislation and efforts to diversify economic reliances. The current geopolitical crises, particularly Israel-Hamas and Russia-Ukraine, continue to attract international attention and concern.
Written by Sabina Rahman