Economy

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In a note to clients, the analysts suggested that “less contractionary fiscal policy” could provide the British economy with a “decent amount of momentum” this year.However, the country’s private sector may struggle under the weight of elevated taxes, borrowing costs and wage expenses, the analysts flagged.In December, official figures showed that the UK economy failed to grow in the July-to-September period, marking a tepid beginning to the government of Prime Minister Keir Starmer. The Office for National Statistics said it now expects gross domestic product output during the three months of 0.0%, down from its prior estimate of 0.1% expansion.Starmer’s government, which came into power in July, has unveiled fresh tax bumps for companies, fueling concerns among many businesses. The negative sentiment was particularly noticeable in the UK’s manufacturing sector, the UBS analysts noted, adding that this “has continued to deteriorate as firms plan for the prospect of a steep increase in taxes.”Meanwhile, the Bank of England has predicted that UK economy will not grow in the final quarter of 2024, although policymakers chose to leave rates unchanged at their latest meeting due to concerns over lingering inflationary pressures.However, the UBS analysts said they believe the “recent slump” in the British economy is “unlikely to persist,” citing the impact of public spending plans announced in the latest UK budget put forward by Starmer and his finance minister Rachel Reeves in late October. The proposal is “likely to result in a fiscal stimulus” that could add an estimated 0.5% to GDP in the coming year, the UBS analysts said, citing forecasts from the Office for Budget Responsibility.Still, the first budget from Starmer and his in-power Labour party has “laid bare the precarious state of the UK’s public purse,” the analysts warned. The decision to press ahead with increased spending — and only offset it partially with higher taxes — “has […] heightened these concerns,” they added.”So, despite large tax increases last year, the outlook for public finances remains challenging,” the analysts said. “How the government will deal with this is yet unclear, but few of the options available are appealing.” More

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This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. A Washington Post story suggesting that Donald Trump might impose selective rather than universal tariffs sent the dollar down yesterday morning. He said the story was “fake news”, and the dollar recovered somewhat. Nobody knows anything about Trump II’s tariff policy, and nobody will for a while. Have fun trading the dollar, everyone, and if you have a moment, email us: robert.armstrong@ft.com and aiden.reiter@ft.com.Tips in ’25Treasury inflation protected securities — Treasuries whose value is periodically adjusted to compensate for inflation — have outperformed plain vanilla Treasuries and fixed-income benchmarks over the past six years. This is not too surprising: there has been quite a bit of inflation, which is what Tips are meant to hedge against.But Tips don’t outperform every time inflation increases. Like any bond, they are sensitive to nominal interest rates, and if the increase in rates is greater than the increase in inflation (or, more properly, break-even inflation, the market’s expectation of future inflation), Tips underperform. What was special about the years 2019-2021, when Tips performed so well, was that nominal rates were either falling faster than inflation (early 2019 to the middle of 2020) or not rising as fast as inflation (mid-2020 through 2021).We’ve used short-term Tips and Treasury indices in this chart because that is the most actively traded part of the Tips market:Some content could not load. Check your internet connection or browser settings.And what made that happen? In the earlier period, nominal interest rates (the light green line) dropped and stayed low as, first, the Federal Reserve went from raising rates to cutting them and, second, the pandemic hit, crushing growth expectations and forcing the Fed to cut to zero. All bonds did well then. In the second period, inflation took hold, but nominal rates did not rise as fast as inflation, allowing Tips to massively outperform other bonds.Some observers argue we are in store for another period in which inflation expectations rise and nominal rates do not — the ideal set-up for Tips. Break-even inflation is now at 2.4 per cent, and has not risen much since the Fed’s December meeting. This could be confidence in the central bank’s ability to keep inflation down. But it could also reflect uncertainty about the inflationary impacts of Trump’s proposed immigration and tariff policies.If the market grows to believe Trump’s policies are, indeed, inflationary, and if the Fed is then forced to hold rates steady, Tips should outperform. From Guneet Dhingra, head of US rates strategies at BNP Paribas:The Fed will have to react to [tariffs and immigration policies] somewhat, but not in a way they can fully stop inflation. We expect the Fed to keep rates unchanged . . . That is the perfect combination, where Tips will protect you against inflation risk, without the response from the Fed [that lowers nominal yields]. Both rates and the break-even side of Tips will be beneficial to investors.Importantly, tariff and immigration policies could increase inflation without substantially increasing the deficit, as opposed to government stimulus and fiscal expansion, which would likely increase nominal yields and hurt returns on Tips (and all other bonds). Elon Musk and Vivek Ramaswamy’s Doge initiative, if it is successful at trimming the budget, could also lower borrowing costs for the government, bringing down real yields and boosting Tips returns.The obvious counterpoint is that Trump’s policies appear to be fiscally expansionary, particularly his proposed tax cuts, if they are not balanced with other sources of revenue (tariff revenues probably won’t be enough of an offset). Fiscal expansion would push break-even inflation upwards, but raise yields at the same time, dragging down Tips returns. According to Brij Khurana of Wellington Management, whether or not Tips really shine will be down to fiscal policy, more than just the Fed. But either way, with inflation picking up, “[it’s good to] own protected bonds, rather than just Treasuries”, Khurana said.(Reiter and Armstrong)A question for readers: industrial productionThe goods economy in the US has been in bad shape for more than two years. Industrial production has been flat since spring of 2022. Executives in the logistics industry constantly talk about a “freight recession”. But there has been a whiff of good news in the air lately. In the widely followed ISM manufacturing survey, the new order component — considered a leading indicator — has been above 50 (indicating expansion) for two months in a row. It looks like the dreary trend may have been broken:There are several possible interpretations of the data. It could be that new orders are responding to higher fundamental demand. Or it could be buyers trying to get ahead of possible tariffs and the accompanying higher prices. Or it could be a blip.Which do you think it is?One good readMaybe the US jobs market is not all that strong, after all.FT Unhedged podcastCan’t get enough of Unhedged? 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A growing number of passengers are bypassing congested hub airports and flying directly, as airlines take advantage of new jets to redraw their networks. Since the dawn of the jet age, airlines have flown large and fuel-hungry planes on the busiest intercontinental routes. These link big airports, before passengers transfer on to smaller planes to connect across a region. But advances in aircraft technology have put this “hub and spoke” model under pressure. Airlines can now use smaller and more efficient single-aisle jets, typically associated with shorter trips, on long journeys, opening up direct routes that would have been uneconomical with larger planes. Passengers flying on United Airlines across the Atlantic next summer will be able to take direct flights from the US East Coast to destinations including Bilbao in Spain, Palermo in Italy and even Greenland. “Smaller, fuel-efficient aircraft like the Boeing 737 Max 8 have enabled new nonstop service to burgeoning niche leisure destinations within reach from the US East Coast,” said Patrick Quayle, senior vice-president of global network planning and alliances at United Airlines. “Our point-to-point portfolio taps into the growing interest in diverse European locales,” he said. Other senior airline executives said that, while the hub airport was not dead, passengers were keen to bypass big airports, in part because of the disruption which has gripped many congested hubs since the pandemic.“We do hear that some passengers are avoiding the very big hubs . . . where there have been delays,” said Bogi Nils Bogason, Icelandair’s chief executive.The changes have led to a shift in how passengers use large airports over the past decade.Among people flying through 10 of the world’s busiest international airports last year, 55 per cent were flying directly to their destination rather than connecting between flights. This was up from a near 50-50 split in 2015, according to a Financial Times analysis of data from OAG, an aviation analytics company. The trend is set to be supercharged by the arrival of an extra-long-range member of the Airbus single-aisle A320 family, which offers a leap in performance. The aircraft took its first commercial flight in November. The A321XLR can carry up to 244 passengers and has a maximum range of 4,700 nautical miles (8,700km) or 11 hours flying time, thanks to the addition of an extra fuel tank in the hold which can carry about 12,900 litres of kerosene. This compares with the older A320, whose maximum range is 3,400 nautical miles.European low-cost airline Wizz Air plans to use the XLR to link the UK to Saudi Arabia on all-economy flights, while Aer Lingus and Iberia will fly the plane across the Atlantic.Christian Scherer, head of Airbus’ commercial aircraft division, said the arrival of the XLR is the “first time in a long time that there is a new aeroplane with new capabilities coming to the market”. “So even though it’s a derivative of the 321, the fact that it opens up a whole new [range] of possibilities in that aeroplane size category, that is a big deal,” he told the Financial Times. The arrival of the XLR “will create new opportunities”, said Icelandair’s Bogason. “We can fly further into North America on a very fuel-efficient narrow-body aircraft.”The airline is considering flights to Texas, California and Dubai from its Reykjavik hub when the planes arrive. “When the cost is lower, it is less risky to start something new,” he said. Airline and airport executives agree that hub airports will still play an important role in flight networks, as the most efficient way of connecting large volumes of people and putting on high frequencies of flights on popular routes. “Our hubs will continue to play a vital role in our network,” United’s Quayle said.London’s Heathrow airport said in December it was expecting its busiest festive period, with a record number of passengers set to pass through during the month. But even hub airport bosses concede that the ground is shifting. “You could say the business model has always been under threat,” said Thomas Woldbye, chief executive of Heathrow, one of the world’s busiest hubs. “Will we see areas which will be less dependent on hubs, not least because of the XLR? Of course we will. But there is an enormous amount of people who want to travel, many come from areas without major airports. So I don’t think the hub is disappearing,” he told an industry conference in November. More

The chief executive of Nippon Steel has warned that tariffs alone would not create a stronger American steel industry, as he pursued legal action aimed at persuading Donald Trump’s incoming administration to launch another review of his proposed $15bn deal to buy US Steel.In his first public appearance since President Joe Biden blocked the takeover last week, Eiji Hashimoto told reporters in Tokyo that the combination would enhance US national security by creating a stronger company.“We don’t think there is any other route that can strengthen the US steel industry more than this deal,” he said. “We never think that industry can become stronger through tariffs alone.”The comments came after the Tokyo- and Pittsburgh-based companies filed a pair of legal cases in the US on Monday, alleging Biden’s decision to block the deal amounted to “wrongful interference”.Hashimoto’s remarks were aimed at Trump, who has argued against a sale of US Steel as he gears up to introduce protectionist measures for the sector. Trump posted on the Truth Social platform on Monday: “Why would they want to sell US Steel now when Tariffs will make it a much more profitable and valuable company?” At the heart of the debate is whether an acquisition of US Steel by a company based in Japan, a crucial Washington ally, would weaken the American steel industry and threaten production levels, or whether a capital and technology injection would enhance national security.Under Biden’s order, the two companies have 30 days to “fully and permanently abandon” the proposed transaction, unless the Committee on Foreign Investment in the US (Cfius), grants an extension. The two companies may seek injunctive relief to push back that deadline, according to lawyers.Hashimoto urged Cfius, the inter-agency body that screens overseas investment, to reopen a national security review under the Trump administration, after it had failed to reach consensus on whether the deal posed a security risk.“This trial is to get them to accept my claims and to gain the right to another Cfius review under a new administration,” he said. “This differs from usual court cases.”Biden’s blocking of the deal has shaken faith in Washington’s support for “friendshoring” — working with allies and partners to build alternative supply chains to China and Russia within US borders and elsewhere.“The court case is important because it tests the outer bounds of the Executive Branch’s authority to review foreign investments,” said Anthony Rapa, co-chair of international trade at Blank Rome, a law firm.Nippon Steel and US Steel’s first legal case demanded that Biden’s order be set aside due to “unlawful political interference” in the Cfius process. The second legal case was against rival steel producer Cleveland-Cliffs, its chief executive Lourenco Goncalves and the United Steelworkers union’s president David McCall, alleging “illegal and co-ordinated actions” to prevent the deal from going ahead.David Plotinsky, partner at the Morgan Lewis law firm, said Nippon Steel and US Steel’s litigation challenge to the Cfius process would be an “uphill battle” due to the expansive scope of what can constitute national security. But “the government is faced with some genuinely bad facts in this case”, he added. More

TOKYO (Reuters) – The U.S. dollar hovered near a one-week low versus major peers on Tuesday as traders considered whether President-elect Donald Trump’s tariffs would be less aggressive than promised.On Monday, the greenback slid against the likes of the euro and sterling following a report in the Washington Post that Trump’s aides were exploring plans that would apply tariffs only on sectors seen as critical to U.S. national or economic security.However, the currency made up some of the ground after Trump denied the report in a post on his Truth Social platform.The U.S. dollar index, which gauges the currency against the euro, sterling and four other rivals, edged up to 108.38, after dropping as low as 107.74 overnight, its weakest since Dec. 30.On Jan. 2, the index pushed as high as 109.58 for the first time since November 2022, in large part due to expectations that Trump’s promised fiscal stimulus, reduced regulation and higher tariffs will boost U.S. growth.”His (Trump’s) 10-20% universal tariffs were always seen as unlikely to eventuate in such stringent form – so the reporting from the Washington Post has cemented this widely held view, even if Trump has played it down,” said Chris Weston, head of research at Pepperstone.”Clearly, the last thing Trump wants at this point is to lose his leverage and credibility going into negotiations … even if the WaPo reporting becomes the reality over time.”The euro zone has been a particular target of Trump’s tariff threats, and the euro was down slightly at $1.03795, after jumping to a one-week high of $1.0437 on Monday.Sterling was also slightly weaker at $1.125085, following its climb as high as $1.2550 in the prior session.The dollar gained 0.3% to reach 158.23 yen, the highest level since July 17, drawing support from higher U.S. Treasury yields.Against the Canadian dollar, the U.S. currency rose slightly to C$1.4345, following its slide to C$1.42805 on Monday for the first time since Dec. 17 after Canadian Prime Minister Justin Trudeau said he would step down as leader of the ruling Liberals in the coming months.”The price tells traders all they need to know: The markets believe the economy will be better off without Trudeau,” said Kyle Rodda, senior financial market analyst at Capital.com.In cryptocurrencies, bitcoin was about 0.9% stronger at $102,560, trading at its highest levels since Dec. 19. More

WASHINGTON (Reuters) – New York City drivers on Monday had to pay $9 to enter Manhattan under the first such congestion fee in the U.S., which seeks to raise billions for mass transit and reduce traffic jams.The fee went into effect on Sunday after New Jersey failed on Friday to convince a judge to halt it pending an appeal.The city rushed to implement the charge before President-elect Donald Trump’s inauguration on Jan. 20. Trump, who has a Manhattan residence, opposes the fee and said he would seek to block it. New York is imposing the $9 charge on passenger vehicles in the daytime in Manhattan south of 60th Street. Trucks and buses will pay up to $21.60. The fee is reduced by 75% at night.Charged via electronic license plate readers, private cars will pay once a day regardless of how many trips they make. Taxis will pay 75 cents per trip and ride-share vehicles reserved by apps like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) will pay $1.50 per trip.While New York is the first U.S. city to impose such a toll, London implemented one in 2003, and the fee is now 15 pounds ($19).Sarah Kaufman, director of New York University’s Rudin Center for Transportation, said Monday that the experience of other world cities shows that the charge initially is very unpopular.Then residents “began to appreciate the reduction in traffic and the increased transit services. So ideally, that’s what will happen here in New York,” she said.New York’s Metropolitan Transportation Authority said the program will result in 80,000 fewer cars a day, about an 11% reduction, in what it called the most congested district in the United States.More than 700,000 vehicles enter the Manhattan central business district daily, slowing traffic to around 7 mph (11 kph) on average. That is 23% slower than in 2010.The city estimates the congestion charge will bring in $500 million in its first year. New York Governor Kathy Hochul said the money would underpin $15 billion in debt financing for investment in subways, buses and other mass transit improvements. More