WeekWatch

UK Chancellor Rachel Reeves will have breathed a sigh of relief last week, after she managed to deliver her Spring Statement without causing much of a market reaction.

Coming into the day, Reeves would have been encouraged by the news that UK inflation unexpectedly fell from 3% in January to 2.8% in February. Clothing prices, particularly women’s clothes, were the biggest driver for the fall, according to the Office for National Statistics (ONS).

Despite this, Reeves’ options for the Statement were somewhat boxed in by economic developments since her 2024 Budget, meaning spending cuts or tax rises were in order.

Ultimately, she chose spending cuts for now, though it remains to be seen whether this will be enough long term.

Describing the market reaction, Johnathan Owen, Portfolio Manager at TwentyFour Asset Managers, said: “Gilts began Spring Statement day in positive territory on Wednesday as they were buoyed by an encouraging UK inflation print, but the fairly muted gains reflected market caution around the spending adjustments later announced by Chancellor Rachel Reeves.

“We suspect the Bank of England will use its May 8 [Monetary Policy Committee] meeting as a window to push through another rate cut, but beyond that markets will need stronger evidence of labour market weakening before pricing in any more [interest rate] cuts for 2025. With growth faltering, fiscal headroom tight, and the risk of tariffs looming, the UK is at a crossroads.”

One statistic to note from the Spring Statement was that the Office for Business Responsibility downgraded the UK’s expected GDP growth from 2% to 1% for this year. This would put it slightly below 2024’s growth. At the end of last week, the ONS released its Q4 GDP statistics, which showed 0.1% growth between October and December, leaving the UK economy up 1.1% for the 2024.

Reacting to this deluge of economic information, markets were broadly flat, with the FTSE 100 up just 0.1% over the week.

Of course, the elephant in the room for all growth projections remains trade policy, specifically those related to the US.

President Donald Trump looks set to ramp up his use of tariffs on what he has termed Liberation Day, on Wednesday.

Currently, we don’t know exactly what will be announced; however, Trump is expected to announce some form of reciprocal tariffs. For the UK and Europe, a key question will be how Trump treats VAT when considering trade barriers. Emerging markets are currently considered vulnerable as well, as they tend to impose higher tariffs on imports.

While Liberation Day is garnering most of the attention, there were several key developments in the US last week. For example, Trump announced 25% tariffs for cars not built in the US, which sent a number of car manufacturer share prices down.

US markets have struggled with the President’s policy shift so far. Last week the Nasdaq dropped 2.4%, while the S&P 500 fell 1.5%.

While these tariffs will cause challenges, Martin Hennecke, Head of Asia & Middle East Investment Advisory, notes: “For all the tariff noise emanating from the US, we should take note that the country’s share of global trade represents only 11% at present, as China overtook the US as the world’s largest trading nation long ago, in 2013 to be precise. As long as the rest of the world sticks to more friendly tariff policies amongst each other there may be hope of potentially less of a Trump fallout than feared.

An example Hennecke points to are recent trilateral talks between Japan, China and Korea, aimed at deepening trade ties.

Tariffs are known to have an inflationary effect. Last week, the Bureau of Economic Analysis revealed US core personal consumption expenditures inflation increased to 2.8% in February, up from 2.7% in January, and above expectations.

With more tariffs likely to be announced in the coming days, the Federal Reserve is likely to face a headache when it next meets to discuss interest rates.

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