Looking for growth: 29/01/2025. Oxford, United Kingdom. Chancellor Rachel Reeves and Managing Director of Great Britain and Ireland Siemens Healthineers Ghada Trotabas during a tour of Siemens Healthineers in Oxford, after delivering an economic growth speech. Picture by Kirsty O’Connor / Treasury.
The British Pound remains vulnerable despite Chancellor Rachel Reeves' efforts to boost sentiment and economic output.
Trying to grasp and reset the narrative in a stalled economy, Reeves announced a series of investments that she says will result in higher UK economic output.
"The UK fiscal story and what it means for UK asset markets remain very much in play. UK Chancellor Rachel Reeves wants to change the narrative from painful tax rises for businesses to UK growth opportunities," says Chris Turner, head of FX research at ING.
Speaking at Siemens in North Oxfordshire, Reeves announced:
- Investments that will deliver the Oxford-Cambridge Growth Corridor. This region is considered to have significant productivity potential for the UK.
- The investment includes improved regional transport links and the view to increase housing and associated amenities.
- Reservoir building
The government also announced it fully backs the expansion of Heathrow Airport and will accelerate measures to overcome entrenched regulatory barriers.
"Sterling is indifferent to Reeves' speech," says George Vessey, Lead FX & Macro Strategist at Convera. "Considering the anticipation leading up to UK chancellor Rachel Reeves’ speech, it ended up being a bit of a damp squib."
However, the individual announcements add up to a more important, bigger-picture development: Reeves wants to boost the economy's supply, i.e., she wants to do things that make the economy produce more goods and deliver more services.
Reeves confirmed the government is investing the equivalent of 2.6% of GDP over the next five years, equivalent to capital spending of £100BN. This is more than the 1.9% outlined by the previous government.
Supply-side growth inherently weighs on inflation and boosts output per person, theoretically making the people of this country better off. Success would support the UK's long-term economic prospects.
But, has she done enough?
"GBP/USD remains pressured in the lower echelons of $1.24, three cents from its 1-year low, whilst GBP/EUR hovers atop the €1.19 handle – still over 1% lower year-to-date though," says Convera's Vessey.
Above: GBP is recovering from a sharp selloff that accompanied growing concerns about the UK's fiscal trajectory.
"What was missing was the framework. There was no place in her narrative for the institutions that will be crucial to delivering transparent, high-multiplier investments — and they are not actually yet up and running. But this emphasis will be necessary if the government is to instil confidence in investors," says Jim O'Neill, a former minister in the UK's Treasury.
Reeves is attempting to raise growth expectations with forecasters at the Office for Budget Responsibility (OBR), whose forecasts will determine whether or not she meets her commitment to keeping a grip on UK debt.
She needs growth to meet these targets; without it, she must raise taxes again and/or cut spending.
"We suspect the government will have to announce some fiscal consolidation in March, largely through real-time spending reductions in the later years of the forecast cycle," says Turner.
Turner says efforts to restore confidence are "very welcome" and have helped the British Pound recover from lows struck earlier in January.
However, "we still feel sterling is vulnerable. Fiscal consolidation in March and a drop in services inflation through the second quarter should lead to a 100bp BoE easing cycle this year. This compares to just 68bp of easing priced by the market today."
He sees "no reason to change our end-year GBP/USD and EUR/GBP forecasts of 1.19/20 and 0.85 respectively."
EUR/GBP at 0.85 gives a GBP/EUR forecast of 1.1765.