WeeklyWatch – Finding economic stability among challenges

17^th December 2024

Stock Take

Bayrou steps in to try and calm the political storm

French President Macron will be hoping to avoid any more Christmas horrors from now on as he pins hopes on his new prime minister, Françoise Bayrou, to unite the messy political arena.

Bayrou is widely considered a centrist in French politics and replaces Michel Barnier as prime minister after his resignation following a no confidence vote. Barnier’s leadership only lasted for a few months, and he was unable to pass a 2025 budget due to intense opposition from both the left and right. If a new budget isn’t passed, then under French law, the government must use the prior year’s budget to avoid the danger of a government shut down.

How has the chaos affected French finances?

Needless to say, Bayrou is entering a challenging scene. The chaos that preceded Barnier’s exit from leadership still prevails and there cannot be a new election until the middle of 2025. The turbulence of the situation was made noticeable through Moody’s downgrading of France’s credit rating on Friday last week as a result of a high deficit.

Among the political and economic difficulties, French equities have unsurprisingly not performed well this year. But it’s worth bearing in mind that markets don’t always perform in accordance with economic performance on a wider scale.

Hopping over the border to Germany

France’s neighbours seem to be exemplifying how a market can perform well despite further challenges. Germany has had a tough time with its economy over the course of this year; however, year-to-date, the German DAX index is up over 20% and trading at record highs. It celebrated further success when it recently broke the 20,000 mark for the first time.

The gradual fall in interest rates has also helped the German market, and more is hoped to come. The European Central Bank (ECB) fuelled these hopes last Thursday when they reduced interest rates by another 0.25% – the fourth move in 2024. This reinforces lower economic growth projections over the next few years in addition to an expected mundane inflationary backdrop.

The ECB President, Christine Lagarde, has given strong indications that more interest rate cuts will take place in 2025; she stated:

“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further.”

Could Trump’s planned tariffs cause inflation trouble?

President-elect Donald Trump has recently had a lot to say about his proposed tariffs under his leadership, and they could have a large effect on inflation.

The US Labor Department announced last week that consumer prices increased by 2.7% in November, which was up from the 2.6% posted in October. This showcased that the pressure of inflation still remains prominent in the US. Despite the small increase in figures, the Fed are still likely to make further interest rate cuts after their meeting this week.

Attention turns to interest rates for the UK

The Bank of England (BoE) are scheduled to meet this Thursday to further discuss interest rates.

The latest economic information showed that the UK’s economy shrank in October on the back of another fall in September. The UK economy has been expected to slow down in the second half of the year after better-than-expected growth during the first half of the year.

The Head of Economic Research at St James’s Place, Hetal Mehta, said:

“GDP declined by 0.1% month on month in October, following a fall in September. While that will most likely mean fourth quarter growth is weaker than what the BoE was expecting, forward-looking indicators are somewhat better. With credit conditions loosening, interest rates moving lower and increased government spending on its way, the UK economy should experience modest growth next year. Signals from the housing market are a good cross-check and show resilience.”

Wealth Check

How well do you understand income tax?

Many people know that income tax is charged at 0%, 20%, 40% or 45% and this is dependent on how much a person earns.

In Scotland, the rates differ slightly, but a 60% tax band isn’t a reality – on paper. But higher-rate taxpayers should stay aware.

Making sense of UK tax

It would be somewhat of an understatement to describe the UK tax system as complicated, but it’s also very appropriate. Tax regulations can change regularly – as seen in the Autumn Budget – and even if an individual is tax savvy, it’s easy to misunderstand or misinterpret the rule changes, and you could walk into a 60% tax trap and not even notice!

How is 60% tax possible?

The name given to this high tax rate is called ‘stealth tax’. It’s an unofficial effected rate of income tax – a 60% rate of income isn’t recognised in any HMRC guidelines.

If you’re earning £100,000 or more, the £12,750 personal allowance (the amount of income you can earn each year without paying income tax) reduces or goes away. As it stands, the allowance reduces at a rate of £1 for every £2 earned above £100,000.

Putting this into more realistic settings, for income between £100,000 and £125,140, £40 of every £100 is taken in income tax. Another £20 is then lost through the reduction of the personal allowance.

In addition, you’ll pay the Employee National Insurance at 2% on the income. All together this totals a 60% tax rate, plus National Insurance. If you’re earning over £125,140 or more, you won’t get any personal allowance at all.

How can pensions make taxes more balanced?

One of the best ways to bring taxable income below the threshold is to put more money into your pension before the end of the tax year. Not only will you reduce your tax bill, but you’ll support your retirement finances at the same time.

If you’re just edging over one of the tax bands, putting more money into your pension can impact your taxes in several ways. Any contribution you make will reduce your taxable income, but we recommend only paying in as much as you can afford.

The maximum amount you can pay into your pension each year is £60,000 – any more and you’ll lose government tax relief on your contributions.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In The Picture

Despite the fall in inflation across the year, Christmas dinners are looking likely to be more expensive than last year’s…

The Last Word

“The darkest days of winter look to be behind us.”

– ECB President Christine Lagarde as she expresses her views on inflation.

Thank you to all our readers for 2024 and we’ll be back on 7^th January 2025.

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SJP approved 16/12/2024