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

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.

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?

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.

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.”

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.

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.

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