Shrinking growth

The International Monetary Fund (IMF) released its latest economic outlook last week, warning that the escalation of trade tensions and elevated levels of policy uncertainty are expected to significantly impact global growth. The report highlighted that the latest US tariff measures, which have raised the country’s effective tariff rate to its highest level in more than a century, along with retaliatory actions by its trading partners, are likely to further dampen global growth. The IMF now anticipates global growth of 2.8% in 2025 and 3% in 2026, down from the 3.3% growth anticipated for both years at the beginning of this year. The all-important US economy is now projected to slow to growth of just 1.8% this year, significantly below the 2.7% forecast made in January. Growth forecasts for 2025 and 2026 were also notably lowered for those countries most significantly impacted by the US administration’s latest trade actions, including China. The report concluded by emphasising that the path forward will require clarity and coordination, with countries working together to foster a more stable and predictable environment.

There was no UK-US trade deal agreement for Chancellor Reeves in Washington last week, with the discussions coming shortly after she had suggested that improving business ties with the European Union (EU) was potentially more important - putting her meeting with US Treasury Secretary, Scott Bessent, on an equal footing with other EU finance ministers who were also state-side. Reeves said the UK may reduce tariffs on cars imported from the US from 10% to 2.5% as part of a wider agreement. But she knows that the UK risks being piggy-in-the-middle between the US and the EU if trade tensions do not thaw. Prime Minister, Kier Starmer and Reeves are looking for a Brexit-reset before a key summit in May, and steering a deft course between the US and EU – or even being a bridge between them – may be critical. However, that reset is broader in nature than just trade, including other key areas such as defence and intelligence sharing. Reports suggest that fishing rights in UK territorial waters may be a barrier to progress. 

Markets enjoyed a strong week, as global indices continued to recover from the bout of significant volatility induced by US tariff announcements. Stocks were buoyed by more constructive trade headlines and easing tensions between the US and China. Optimism was further fuelled by speculation around near-term trade agreements with several other key trading partners. Additionally, better than expected US corporate earnings releases further buoyed investor sentiment.

US equities led the global rally, with the technology-heavy Nasdaq climbing +6.4%, and the broader market up +4.7% (both in USD terms). Closer to home, the UK’s FTSE 100 gained +1.7%, extending its winning streak to ten consecutive positive sessions – the longest in eight years. European markets also posted robust gains, with Germany’s DAX advancing +4.9%, France’s CAC 40 rising +3.4% and Italy’s MIB index up +3.8% (all in local currency terms). While equity markets rallied, the volatility index (or VIX), often referred to as the market’s ‘fear gauge,’ declined sharply from recent highs, although it remained elevated relative to historical averages. Meanwhile, the US dollar broke its four-week losing streak, strengthening against most major currencies over the course of the week.

UK inflation data came in lower than expected at 2.6% on an annual basis, with falling petrol prices cited as a key reason for the softer print. Although the data was for March, and a range of rising household bills are expected to apply upward pressure to near term inflation prints, the Bank of England is now fully expected to cut interest rates in May.

China’s economy grew 5.4% in the first quarter of 2025 from a year earlier, according to the country’s statistics agency - exceeding expectations for the period immediately prior to the imposition of US trade tariffs. The better than anticipated print could therefore be down to exporters front loading activity ahead of an anticipated hike in trade costs. Policy makers in Beijing are aiming for annual economic expansion of “around 5%” as they look to overcome a drawn-out property slump, and low consumer confidence domestically, as well as navigating US tariffs. US-China trade tensions also showed signs of beginning to impinge on US firms’ activity, as microchip maker Nvidia announced an expected USD 5.5bn costs hike as a result of tightened export rules to China, while Beijing told Chinese firms not to place new orders with US airline, Boeing.

• UK retail sales volumes were estimated to have risen +0.4% in March by the Office for National Statistics (ONS), despite expectations of a decline of the same magnitude. It means sales volumes rose by +2.6% over the year to March vs +1.8% expected
• US durable goods orders soared +9.2% in March vs +2% expected and up from 0.2% in February, as companies seemingly brought forward orders for big ticket goods ahead of US tariffs on imports
• China exempted some US imports from its 125% tariff levy in the latest attempt to mitigate the economic fallout from the trade war
• Japan complied an emergency economic package to alleviate the impact on industries and households from US tariffs – including support for corporate financing; lowering gasoline prices; and partially covering electricity bills for three months
• US 30yr mortgage rates have remained elevated following a rise since “liberation day” – advancing from c.6.6% on 4 April to touch close to 6.9% last week
• Swiss drugmaker, Roche, announced plans to invest USD 50bn in US over the next 5 years in effort to avoid tariffs. The move is expected to create 12,000 new jobs

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