Merz Set To Take Power, BOE Mulls Tariff Cuts, Non-Dom Cost Warning
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This is the Bloomberg Daybreak Europe podcast, available every morning on Apple, Spotify or wherever you listen. It's Tuesday, the 6th of May in London. I'm Caroline Hepker. And I'm Stephen Carroll. Coming up today, Friedrich Merz gets set to become Germany's new chancellor this morning as he vows to hit the ground running. Forecasters say US tariffs will force the Bank of England to ramp up rate reductions.

Plus, going, going, gone. Evidence shows the UK's move to abolish non-dom status may cost more than it raises. Let's start with a roundup of our top stories.

Germany's parliament is set to elect Friedrich Merz as the country's next chancellor in the coming hours. The conservative leader will head a coalition alongside the Social Democrats at a critical moment for Europe's largest economy. Our Germany bureau chief Christoph Rawald says Merz will be looking to follow through on his promise to enhance his country's role in European security.

Pushing through economic reforms will definitely be on top of his list and also will be particularly in focus in coming days will be his efforts to liaise with other European leaders like French President Emmanuel Macron or the Polish President Tusk. Germany has been notably passive under outgoing Chancellor Olaf Scholz and Merz really has pledged and made it one of his top priorities to change that and play also a more active role on the European stage again.

Christoph Auerwald speaking there. Once sworn in, Merz will preside over his first cabinet meeting. Germany's economy is stagnating after two years of recession. Russia's war in Ukraine is still raging to the east and support for the far-right alternative for Germany is strengthening, especially in former communist eastern regions of the country.

China's services activity fell to its lowest level in seven months, according to a private survey. The Kaixin PMI, or Purchasing Managers Index, fell to 50.7 in April. That is below the median forecast of 51.8, and it suggests a reduction in staff and new business orders. Analysts polled by Bloomberg forecast China's second quarter GDP growth could slow to 4.2%, below the Finance Ministry's 5% target.

All 32 economists in Bloomberg's survey believe the Bank of England will cut interest rates this week. A quarter point cut is baked in for the meeting this Thursday, the fourth rate reduction from last year's peak of five and a quarter percent. Most economists expect the central bank to switch to a dovish stance, judging that Donald Trump's tariffs and uncertainty about his future plans will weigh on growth and temper inflation.

If the Bank of England cuts again in June, it will be the first time borrowing costs are lowered at successive meetings since early 2009 during the financial crisis. Now, the UK's new taxes on non-domiciled residents will start costing more than they raise if one in four of those affected leaves. That's according to the Centre for Economics and Business Research, which argues that the official forecast has underestimated the risks.

The independent think tank's managing economist, Sam Miley, says that it's a risk to the public finances. Ultimately, the policy is being made and supported by figures that are inherently uncertain. So it suggests that there is a significant risk to fiscal matters based off what is an entirely uncertain variable.

Miley's report comes as some of Britain's richest investors have already said that they are leaving, including Goldman Sachs' Richard Noddy. A spokesperson for the Treasury said that it did not recognise the CEBR's figures and that the Independent Office for Budget Responsibility sees the changes, raising £33.8 billion over the next five years.

UBS has agreed to pay $511 million to settle a US investigation into how Credit Suisse helped rich Americans to evade taxes, even after pledging to stop the practice a decade ago. The resolution ends a long-running scandal involving the lender, which was acquired by UBS two years ago. UBS said in its first quarter report that it had a provision for potential costs tied to the case, but didn't disclose an amount.

Ford is suspending its full-year guidance, saying that it expects a $1.5 billion hit to profits due to President Trump's tariffs. The news comes despite the carmaker reporting first-quarter profit that beat expectations. Speaking to analysts, CEO Jim Farley said the firm is still unsure of the full impact of levies.

It's still too early to fully understand our competitors' responses to these tariffs. It's also early to gauge the related market dynamics, including the potential industry-wide supply chain disruptions and the impact of Ford's domestic manufacturing advantages. And as a result, we decided to suspend our guidance.

Ford's Jim Farley speaking there. Despite the negative impact to the automaker's bottom line, Farley went on to voice support for the Trump administration's efforts to bring auto manufacturing back to the United States. Ford's shares fell 2.4% in after-hours trading on Monday.

The clash between President Trump's administration and Harvard is continuing as the White House blocks new funding for the university. It comes after accusations of ideological bias at the institution by the US government and its conservative allies. Bloomberg's Tiwa Adebayo has more.

Harvard University has been declared ineligible for new research grants from the federal government. That's after Education Secretary Linda McMahon sent a letter to the Ivy League school warning access to financial support would be withheld until they could demonstrate what she calls responsible management. Bloomberg understands that to reverse the diktat, Harvard will need to enter negotiation with the administration.

Sources close to the matter say the change could affect over $1 billion annually for the university, although the administration did not immediately detail the figure. In response, a Harvard spokesperson said the latest demands amount to improper control of the institution, with chilling implications for higher education. In London, Tiwa Adebayo, Bloomberg Radio.

And those are some of your top stories. Now, let's get to the markets this morning. On the Bloomberg Dollar Spot Index, the dollar is up a tenth of 1%. Taiwan's dollar appreciation is stabilising this morning. Asian FX steadying really after a couple of days of gains. You've also got, though, US stock futures in the red. So, the Nasdaq futures down by almost half of 1% this morning. This, as we're looking at European stocks, also down.

down just a fraction although actually Germany did reasonably well yesterday you did see the ZetroDAX gaining about just over 1% of the close yesterday so just shy of record highs Ford stock they fell 2.5% in extended trading Palantir big tech

firm also fell over 9% in after hours. U.S. Treasury's had a weak session yesterday. Ten-year yields this morning will begin trading at 4.34. This is gold takes its two-day rally now to more than 4%. So, gold continuing to rally. We are up 0.8% this morning. That is a look at the markets.

In a moment, we'll bring you more on the challenges facing Germany's new chancellor, plus why the much-heralded end of the non-dom tax status in the UK might not be as good for the public finances as the government has hoped.

But another story that's caught our eye this morning, or I should say series of award-winning stories, because Bloomberg News' CityLab has won a Pulitzer Prize for criticism for a collection of essays from our colleague Alexandra Lang. This is a fascinating series. I love CityLab because I love thinking about the cities that we live in and how we can basically change them for the better. And Alexandra has written a series of pieces about the use of public spaces and how they can be better for families. And there's...

They're not just fascinating to read. There's some really interesting ideas in there as well. The idea of making public spaces, you know, better, easier for families to be able to live and to be able to also keep families in city centres. Yes, she writes about how design promotes better mental health for children. She's written about how burnt out parents need better public spaces, about how the physical design of sort of housing and transportation and public spaces... Skate parks. Yes, it's...

The range about which she writes is so interesting. And also, as a parent, it really brought this to mind that people often don't understand how fundamental certain play equipment is. Why do you always see, you know, the swing or the monkey bars in...

in children's playgrounds. It's hugely important for child development, basically. Things like writing, monkey bars are massively important for that. People don't often understand why those things exist. And she really brought all of that stuff out for me. It's not just about not using screens, essentially. There's a lot more to it. But look, a section of our stories, we'll put a link in our show notes for the Bloomberg Daybreak Europe podcast to some of those award-winning pieces. And congratulations to Alexandra Lange.

Now, more than two months after Germany's federal election, Friedrich Merz finally becomes chancellor. Today, he's coming to power at a critical time for Europe's largest economy. Our EMEA news director, Roslyn Matheson, joins us now for more. Good morning, Ros. What's at stake then, do you think, for Germany under Merz's leadership now? There are important changes he's already been trying to bring in, as we know, trying to get the debt cap down.

and also a big increase in infrastructure and defence spending for Germany at a time that the economy is really being stagnating and fundamental questions about how do you take an economy that's very much based around manufacturing and how do you adjust that

for a modern world and make it competitive. And so like a lot of countries, there are questions about what are the new big things that are going to propel the German economy and how do you shift its manufacturing base again to something else? And so there's a lot of expectations there.

for him, obviously for Germany, but also for Europe as a whole, because the backdrop, of course, is the trade tensions with the US, the Trump administration questioning Europe's ability to take care of itself and defend itself, the need to find a solution to Russia's war to Ukraine. So there's an awful lot on his plate. And the question is, what is he going to do that his predecessors did not?

Raz, of course, even before Friedrich Merz became Chancellor, he's already managed to get this package through the Bundestag, which is going to see a massive increase to defence and infrastructure spending and changes to the rules around spending on defence in general. How quickly will he be able to start spending that money?

Well, he's pushing to start pretty quickly and that's mostly on the infrastructure side. So you could see increases in spending around railways, bridges, highways fairly quickly out of this. Although, again, these things don't get built quickly.

in a day, but they will lay the bones of a broader revamp of the economy over time. The question is, we know that in fact there's already some money in the mix in Germany, but it's been unable to be spent.

because of a lot of rules around the way that bureaucracy works and so on and getting permissions and plannings. And so it's not just about getting the money there to spend it. It's also about making it easier for it to be spent and to cut red tape. And that's something that we're not necessarily hearing a lot of clarity on

as yet from this incoming administration, is you've got the money, but how do you make sure it goes where it needs to go? And it sounds like they are keen to start spending it quickly, but there are a lot of issues around how they get that money where it needs to be and to do so quickly. Maz has also made big promises to curb illegal migration. I mean, this is an issue a lot of countries in Europe are talking about now. It could also, though, create problems with Germany's neighbours. Yes.

Well, it could. It could create problems both at home and with its neighbours, as you say. I mean, they're grappling with the rise of the anti-immigrant party, the AFD, which has only just been formally classified recently as a right-wing extremist group. So that's very much back in the news and in the conversation today.

in Germany. So pushing MERS to take a harder line on migration. And the question is, what does that look like? And what is the impact on the region? Because as we know, migration questions in Europe aren't just confined to

to one country. So if one country shuts its borders or says it's taking fewer migrants, where do those migrants go? Is there a knock-on effect on other countries which then have to grapple with those people diverting? And so you get a lot of questions from neighbours about what does this mean for them if these people come towards Germany

get turned away, where else do they go? Because Germany's really under, you know, Angela Merkel, particularly when she was chancellor, really sort of became known as a place that was willing to take migrants, especially during some of the waves that we saw because of conflict in the Middle East and people coming from North Africa. So if that changes and these people get sent somewhere else, that's going to raise tensions inevitably with other countries in Europe.

What about for Merz himself? Even since the elections, he's been under pressure in the polls. Well, it's funny because normally leaders come in with a honeymoon period and, you know, but also high expectations. And so if they don't deliver quickly, there's a crashing sense of,

of disappointment. Merz has arguably already done some extraordinary significant things before he's even in the chair as chancellor, but equally his popularity ratings are relatively low and have tended to be consistently over years. So only 18% in one poll said that they believed he'd do a better job of running the country than Merkel and almost half said they expect him to be worse. So perhaps

The benefit of low expectations is that Murs actually only has upside from here to deliver and doesn't collide with the idea that he has to be doing a lot quickly. But that said, it does point to the challenges he faces about selling his agenda to the German people, selling himself to the public. And we've seen that over and over again. So the question is, he's got a lot he wants to do. Can he find a way to sell it to the German people?

Okay, Ros, thank you so much for being with us. Our EMEA News Director, Roslyn Matheson. When you have bars in the sky, onboard showers and award-winning in-flight entertainment, it's no surprise that Emirates was recently named the best airline in the world. We fly you to over 140 destinations, and with partners across the globe, we connect you to another 1,700 cities across six continents. So when we say we're also the largest international airline, what we really mean is...

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Now, Britain's Labour government has talked a lot about ending the so-called non-dom tax status in last October's budget, saying it would help to boost the tax take. But after changing the rules, a new report from the Centre for Economics and Business Research suggests the tax change will end up costing more than it raises if the wealthy people who held the status leave the country. Our UK politics reporter, James Wilcock, joins us now for more on this story. James, what does this new report say and why does it make difficult reading for the government?

Well, the tax was supposed to raise revenue, Stephen, by changing how people who are not tax resident in the UK, but often quite wealthy and live in the UK, pay it. They would now all be paying their tax on foreign earnings. But this report says, firstly, the OBR is overestimating how much the tax will raise by taking the wealthiest people when it made the estimates and it calculates the tax of

to find out. The OBR is estimating the new tax will bring in £4 million per person. And they're like, it's probably closer to £600,000 per person.

And secondly, they're saying there are some wild ranges in the estimates of how many people will leave in response to this tax. The OBR say it's 12%. Oxford Economics say it's 32%. And then there are surveys of some sort of non-doms, some sort of wealthy private tax lawyers who could put the number higher, close to even 60%.

They then don't take a view on how many people are leaving, but they say if more than one in four do leave, that's the point in their analysis where the Treasury starts losing money. And this is very difficult for the government because they have said this is an ideological threat.

commitment. It's in Labour's manifesto, but it's framed as making people money. The government say this is supposed to make 33 billion over five years. And this report, which I note, although it is independent, is commissioned by a think tank linked to Onward, a conservative think tank, as saying...

it's actually quite a gamble. And at the 25% mark, you'll start becoming a fiscal risk. Yeah. And the issue is that there are only tens of thousands of these extremely wealthy individuals. And so actually, it only depends on a relatively small number of people changing their behaviour.

How likely is it then that the ultra-wealthy will go? I mean, Bloomberg, we've already reported on a lot of individuals and what their movements are. I mean, as you say, it's a really difficult question. So 74,000-ish thereabouts in the UK right now.

Because you have to self-declare to the HMRC that you're doing this, the data has a two-year time lag. So we won't know for sure for two years. All I have for you, Caroline, are estimates, anecdotes, and precedent. Estimates we've gone through, between about 12% to up as high as 60%.

Then anecdotes, we're hearing Goldman's Richard Noddy is already left for Milan. The real estate magnates, Ian and Richard Livingston, they've left for Monaco. So we are seeing certain reports that some individuals are leaving, but some doesn't equate to any kind of number. And precedent, when Switzerland put in place a tax on its wealthy, in the long run, 30% left.

So, at the very least, the OBR's estimate, we can comfortably say, is at the lower bound of where this is. But as to where it will end up, it's hard to tell. London has a lot going for it. It has all these amenities. It has a very nice place to live. I mean, apart from the bank holiday, you could say it has nice weather as well. The danger, though, is that there is a risk of what's called a wealth-fleeing spiral, where if all your friends are going, if you also could go, if there's a lot of tax advisors offering you a way out...

it might be time to leave. Well, if they do leave, where are they likely to go? Well, I mean, you have the greatest hits, Stephen, of tax havens, Switzerland, Monaco, the Bahamas. But increasingly, we're seeing new countries, especially in Europe, who are trying to lure in some of these kind of very wealthy, mobile, sort of high capital individuals. Italy, you have a flat tax currently of 100,000 euros. And then after that, you can have any sort of foreign gains you want. That's rising to 200,000 euros. So getting quick.

Greece, if you invest half a million euros, you can then play a flat tax of 100,000 for 15 years. Or you could go to Dubai, where they don't levy any income or wealth tax whatsoever.

This is Bloomberg Daybreak Europe, your morning brief on the stories making news from London to Wall Street and beyond. Look for us on your podcast feed every morning on Apple, Spotify and anywhere else you get your podcasts. You can also listen live each morning on London DAB Radio, the Bloomberg Business App and Bloomberg.com.

Our flagship New York station is also available on your Amazon Alexa devices. Just say Alexa, play Bloomberg 1130. I'm Caroline Hepke. And I'm Stephen Carroll. Join us again tomorrow morning for all the news you need to start your day, right here on Bloomberg Daybreak Europe.

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