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Week Ahead (13 March)

Wednesday, 15 March - Chancellor Jeremy Hunt to unveil UK Spring Budget

On Wednesday, UK Chancellor Jeremy Hunt will unveil the Spring budget statement. According to the latest reports Hunt could soften a planned rise in corporation tax from 19% to 25% from April.

Business leaders have criticised the measure, arguing that it could further undermine the UK’s status as a global hub for business, even though a corporate tax raise to 25% would still be the lowest rate in the G7 group of the world’s most developed nations. To that end, new tax reliefs encouraging companies to invest could be introduced.

It is expected that the UK government will also introduce some consumer-friendly measures, to balance a potentially softer stance on businesses. It remains to be seen whether it will opt for the extension of the energy price cap for a further three months, aiming to limit the average household annual bill to £2,500. This measure would cost £3 billion and could help ease the public outcry about the cost-of-living crisis, even though falling energy prices will eventually bring annual household bills below that threshold.

Since the introduction of the Autumn budget in November 2022, the short-term economic outlook has shown some improvement. The UK narrowly avoided a technical recession in Q4 2022, following a contraction of 0.2% in Q3 2023. Last Friday, the Office of National Statistics (ONS) released its GDP monthly estimate for January, revealing a stronger-than-expected growth of 0.3%, following a contraction of 0.5% in December. Nevertheless, the UK is the only G7 country yet to fully recover its lost output during the pandemic, with its level of GDP in Q4 2022 being 0.8% below its pre-Covid level at the end of 2019.

Thursday 16 March - Net Zero Industry Act to be unveiled by the European Commission

On Thursday, the European Commission will present its ‘’Net-Zero Industry Act’’, two days later than originally announced. The Act is part of the Green Deal Industrial Plan, the EU’s own response to the U.S Inflation Reduction Act of 2022 (IRA).

With the Act, the Commission is expected to identify goals for its net-zero industrial capacity and provide a regulatory framework for the quick deployment of renewables, including simplified and fast-tracking permitting, the promotion of European strategic projects, and the scale-up of technologies across the bloc. This could be achieved by national funding, through the further loosening of EU state aid rules in the coming years allowing member states to more easily use subsidies, and through the establishment of a ‘’European Sovereignty Fund‘’ at an EU level. France and Germany are favoring the former, calling for tax breaks and more relaxed state aid rules for clean tech. On the other hand, smaller member states favor European funding that would ensure a level playing field. Commission officials have also diverging views and the current draft version of the Act could undergo several amendments until Thursday.

According to the leaked draft version of the Act, nuclear energy was dropped as a strategic green technology. It remains to be seen whether it will be included in a possible amendment, with France and Sweden being strong backers.

In February, the Commission’s competition chief, Margrethe Vestager, who is traditionally more sceptical of subsidies than Internal Market Commissioner Breton, suggested a new temporary state aid framework, including the introduction of ‘’anti-relocation investment aid’’ in order to prevent firms from leaving the EU.

Meanwhile, last Friday, the European Commission’s President von der Leyen met with U.S President Joe Biden, agreeing to the launch of a ‘’Clean Energy Incentives Dialogue’’ to boost transparency and coordinate their respective incentives programmes for their net-zero industries. The two sides also agreed to start discussions on the trade of critical raw materials.

Thursday, 16 March - Critical Raw Materials Act to be unveiled by the European Commission

On Thursday, the Commission will also present the Critical Raw Materials Act. The Critical Raw Materials Act is also part of the Green Deal Industrial Plan and will be complementary to the ‘’Net-Zero Industry Act’’.

The Act will aim to secure the bloc’s access to critical raw materials, with the introduction of EU supply targets for raw critical materials, such as nickel and lithium, which are essential for manufacturing key technologies. According to a leaked draft, the Commission will seek to ensure that the EU can extract at least 10% of its annual consumption of strategic raw materials by the end of the decade. More specifically this will concern those materials deemed ‘’strategic’’ for their role in the green and digital transition and those materials included on the EU’s list of critical raw materials. The draft also calls for a minimum of 40% of the EU’s annual consumption of strategic raw materials to come from their domestic processing, and for recycling to account for at least 15% of annual consumption. Finally, it includes the establishment of a European Critical Raw Materials Board to advise the Commission and member states.

The lessons learnt from its energy dependence on Russia have shaped the bloc’s approach when it comes to its reliance on China for technological goods and critical raw materials. 19 out of the most 30 raw materials deemed ‘’critical’’ by the EU are imported from China, which enjoys a ‘’quasi-monopolistic’’ position.

Thursday, 16 March - ECB Governing Council to hold monetary policy meeting

On Thursday, the ECB Governing Council (GC) will meet to decide on the next steps to bring Eurozone inflation back towards the 2% target. A 50 basis points increase seems a certainty, given that core inflation remains persistently high.

Minutes of the February meeting showed a determination to continue hiking rates beyond March, an opinion reiterated by Slovenian Central bank Governor Bostjan Vasle earlier this month. Despite an overall decline in consumer prices, the ECB Governing Council appears more concerned about core inflation.

Eurozone inflation is expected to be 8.5% in February, down from 8.6% in January and 9.2% in December, following a recent drop in energy prices. However, core inflation hit record levels, rising to 5.6% from 5.3% in January.

Although the ECB GC has so far been unanimous on its rate hikes, a debate could emerge in the coming weeks on whether to continue with 50 basis point hikes or adopt a more moderate approach with 25 basis point hikes in May and June. Indicatively, from the hawkish side of the debate, ECB’s GC member Robert Holzmann said last week that he would back 50 basis points interest rate hikes at every meeting through July. This would take rates to 4.5%, well above the 4% peak rate priced in by markets. Responding to Holzmann’s comments, his Italian peer Ignazio Visco stated last Wednesday that he ‘’did not appreciate statements’’ by his colleagues ‘’about future and prolonged interest rate hikes’’, indicating a growing rift at the ECB.

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