Confidence, sentiment and stability provide the springboard to growth
27 December 2024, 09:43
By April 2024, it became obvious, barring any unforeseen accidents, that Labour would win the forthcoming General Election, with a bit in hand.
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At the start of the year Messrs Starmer, Reeves, Reynolds and Siddiq set down their stall in the dining rooms and boardrooms of the captains of industry and the ‘good and the great’ from the City of London, which had been a gold mine for the Treasury since ‘Big Bang in 1986’.
Labour’s smoked salmon and crème cheese bagel charm offensives were more than just bait to persuade business that it had nothing to fear from their plans to reinvigorate the economy and by doing so, it would be taking our crumbling public services out of the sickbay, with NHS as its standard bearer.
The financial press bubbled over with enthusiasm at the prospect of a Government aching to prove that it was financially fit for purpose. The ebullience and enthusiasm displayed by the business community for the brave new world of a fresh Labour administration, which promised to focus on growth, knew no bounds. Many were ecstatic at getting rid of the incompetent and tired Tory administration, which had generated anaemic levels of growth for 14 years.
The Chancellor put together a National Wealth Fund, to be chaired by Mark Carney, which included luminaries such as Aviva’s Amanda Blanc and Barclays’ Venkatakrishnan. The City of London was quivering with excitement.
PM Sunak delivered Labour a massive bonus by erroneously calling the General Election in early July 2024. A majority of 165 was duly delivered on 5th July 2025 - alleluia! Praise the Lord - job done! Though there were summer holidays to be taken and forensic work from the Treasury and OBR to be scrutinised, Labour and especially the PM and the Chancellor made a huge error of judgement waiting just over 3 months to deliver a very controversial Budget.
The Cabinet bobbed, weaved, ducked and dived, endlessly avoiding answering questions on the content of the Budget, which it was legally forced to do. Growth was about the only word that was constant; in fact it was almost too repetitive. Also, the Chancellor droned on about stability. However, as the days ticked by waiting for the Budget, uncertainty started to play more than a spear-carrying role.
Business, industry and commerce was aghast, at not so much by the increase in taxation, but it was horrified at the choice of financial weapons - an increase in employers’ national insurance contribution, which was going to raise £25 billion out of the £40 billion required. This tax was clearly anti-business and inflationary, potentially increasing unemployment and therefore putting any serious chance of growth to the sword.
Chancellor Reeves’ spurious £22 billion ‘black hole’ was a convenient added distraction.
When Chancellor Reeves was putting her Budget together, one of her key advisors should have dropped some advice in her ‘shell-like’. To deliver growth from business, which was no longer reticent, three ingredients were essential to deliver growth - CONFIDENCE, SENTIMENT AND STABILITY! In a heartbeat post the Budget they all but disappeared in a puff of smoke.
It became clear that the Gilt market was far from enamoured with the content of the Budget, with yields rising close to those that prevailed during the Truss carnage. Not unexpectedly, FTSE 100 and 250 have drifted into the doldrums. We have been very short of risk takers. In this environment and are unlikely to pop their heads above the parapet. It should also not be forgotten that inflation is starting to prove stubborn around 2.6%; so more than two 25 basis point cuts in 2025 to 4.25% seems unlikely.
At the same time as these uninvited machinations, President-elect Trump is on the charge with many policies that are an anathema to liberal-left’s political thinking. The idea of trade tariffs is dispiriting. The UK Government, aided and abetted by a new Ambassador to the US - the wily Lord Mandelson, who might even seek the help of Nigel Farage to ‘sooth the furrowed brow’ of President Trump, will have their work cut out in attempting to persuade President Trump that the UK is worthy of a free trade deal.
In fairness Labour have only been in power for 6 months. However, all these imponderables leave the Government in a quandary. What must it do to prevent the UK drifting into mild recession? Let’s face it no growth in the 3rd quarter was almost certainly due to the draconian content of the October Budget, which throttled any positive prospects for the economy.
There I was no doubt that the public accounts were in a poor state, resulting in a sharp increase in taxation. However, business and the public at large perceived that the Budget was largely political rather than economic. Whoever advised the Chancellor should have informed her that an excess of confidence in their policies was a prerequisite to achieve measurable growth.
For many, Brexit has proved a thorn in the side of investors. To date it has only been delivered in name. The Tories were given a Heaven-sent opportunity to use Brexit as a potent tool to attract financial services opportunities to London, by cutting stamp duty, taking a softer approach to regulation and to provide fintech and a host of SMES with improved tax incentives to ply their trade.
The Conservatives failed to grasp the nettle and Labour seem equally uninspired in accepting the challenge.
There is also a need to deal with the disparity in the business rating system.
UK assets seem as cheap as chips, many being valued at a 40% discount to its peers in the US. Private equity is likely to be very active in 2025, especially in energy. It also looks as if the authorities have made the rules easier and more attractive for private equity to do deals rather than aspiring SMES to take their chance with an IPO on AIM or Aquis Exchange. This is frustrating, resulting in a wider array of investors not being given the opportunity of exposure to many innovative opportunities.
There has been a dearth of IPOS in the past two years. However, poor growth and stubborn inflation with interest rates falling more slowly than expectations may trigger a flurry of M&A deals. Aviva is about the complete the acquisition of Direct Line and talks between Honda and Nissan are under way.
The current climate indicates that there are more of these deals in the pipeline.
The other ingredient missing is risk appetite. The mood is too downbeat for boardrooms to select another gear by taking sensible risks to achieve expansion goals.
If the Government really believes in growth then it must offer the incentives needed for investors to be enticed into the ring of opportunity. Currently, why would international investors come to London, when the Trump Circus is about to roll into town?
After all, President Trump understands that the enemy is socialism and that the other enemy is the state.
The Government also knows that there are 9 million people in this country without gainful employment - the retired, unemployed, mentally ill, and those ill-disposed to the workplace. It knows this is an unacceptable piece of data and it must be dealt with; but how? That is the question. The UK probably needs a ‘Musk’.
Good hunting and a Happy New Year!
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David Buik is LBC's Markets Commentator.
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