The economic challenge for Labour

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Good evening.

The UK as a safe haven for investors seems an unlikely proposition after several years of political uncertainty and an unruly departure from the world’s biggest single market. But judging by market reaction to yesterday’s better than expected growth figures, the new Labour government has grounds for optimism.

To be clear, the road ahead is daunting. As today’s Big Read details, new chancellor Rachel Reeves — the first woman to take charge of the nation’s finances — is facing crises on multiple fronts, inheriting what she claims are “the worst set of circumstances since the second world war”.

Much of Reeves’s agenda, big on stability and fiscal discipline, is predicated on improved growth. On that score at least, she has had a lucky start, with yesterday’s GDP figures for May coming in at a double-than-expected 0.4 per cent after flatlining the previous month.

Sterling rose to its highest level against the dollar in almost a year on the data, albeit helped by lower-than-expected US inflation driving down the greenback.

The chancellor has also emphasised her business-friendly approach. Today we report on her plans to create a council of economic advisers to help guide the quest for growth and improve the UK’s lamentable record on productivity, which has languished since the global financial crisis of 2007-2008.

We also report today on the plans for next week’s King’s Speech, which will detail the new government’s plans for the parliamentary session.

These will include measures empowering the Office for Budget Responsibility to independently publish forecasts of any big fiscal event involving tax and spending changes; employment reforms including a crackdown on zero-hours contracts; and legislation to set up GB Energy, a new state-owned investor that will take stakes in renewables and nuclear projects.

Labour is also expected to legislate to put the entire water industry in “special measures” that would see executives face bonus restrictions and potential criminal sanctions if they fail to clean up rivers and beaches. The industry regulator yesterday put Thames Water into a special “turnaround” regime that may require the UK’s largest water company to break itself up. (You can read more on that in this explainer).

Work has already started on another of Labour’s big ideas: a £7bn National Wealth Fund that will start investing “immediately” in areas such as green steel and gigafactories in the push to decarbonise Britain’s heavy industry.

The FT editorial board lauded the move as part of efforts to overturn decades of under-investment, which has seen the UK at the bottom of the G7 table for total investment for 24 of the past 30 years.

Delivering on all aspects of the investment agenda will be critical, the FT said: “Without a sustained increase in both public and private capital expenditure, Labour’s national mission of long-term economic growth will remain a pipe dream.”

Need to know: UK and Europe economy

French central bank chief François Villeroy de Galhau warned that political uncertainty following the country’s election meant business leaders were slowing down investments and hiring as they hedged against possible tax increases.

Germany ordered a staggered ban on Chinese components in domestic 5G networks by 2029, ending a long-running dispute over the danger of Beijing’s involvement in critical digital infrastructure.

Need to know: Global economy

US inflation fell to a more-than-expected 3 per cent in June, leading traders to up their bets on two interest rate cuts from the Federal Reserve this year. Fed chair Jay Powell told Congress there had been “considerable progress” in tackling inflation.

The world’s central banks meanwhile are growing increasingly worried about “unsustainable” levels of government debt, which they believe could drive up borrowing costs.

China’s exports grew at the fastest pace in more than a year in June, boosting hopes that manufacturing can energise the country’s faltering recovery. All eyes are now on the Communist party’s leadership as it prepares for a closely watched economic policy conclave on Monday, although it has played down hopes of “strong medicine”.

The global population is set to shrink this century, with 200mn fewer people than previously expected by 2100, according to a UN report that highlights the dramatic impact of falling birth rates.

An FT Big Read examines how the investment world is trying to make sense of a turbulent period in geopolitics. “Over the past 20 or 30 years, [geopolitics] has been deflationary, created lower risk and made it easier to invest,” said one investment manager. “Going forward it is the complete opposite: it is probably inflationary; it is probably going to create more risk; and it is going to make it harder to invest.”

Need to know: business

Wall Street reporting season began in earnest. JPMorgan reported record second-quarter profits fuelled by a dealmaking revival; Citigroup announced a 10 per cent rise despite mounting credit card losses; and Wells Fargo blamed “tepid” demand for corporate borrowing for a slight fall in profits.

US telecoms company AT&T suffered a huge cyber security breach earlier this year as hackers accessed the call and text data of “nearly all” its wireless customers.

The FT revealed that German billionaire Mathias Döpfner and private equity group KKR were negotiating a break-up of media conglomerate Axel Springer, the group behind US news sites Politico and Business Insider, and German publications Bild and Die Welt.

Tesla’s share of US electric vehicle sales has fallen below 50 per cent for the first time, as the world’s largest EV maker faces increased competition in its domestic market.