17/05/2025 by Tony Redondo
If a year ago, someone would had announced that the best-case scenario would be for average US tariffs to quadruple, from 2.5% to over 10% they would have been considered a “doomsayer”. Today, the financial markets cheer the news. We are in the midst of a classic game of maximalist demands and gradual de-escalation.
Separate the signal from the noise on tariffs and the damage done to date is not significant.
The tariff reductions announced in Geneva last week between the US and China are welcome as they moderate the probability of an acute economic crisis and the expectation is now of more bilateral trade deals to follow through in the next few weeks, further calming nerves.
The stock markets have already responded with the S&P posting its strongest 22-day surge since 2020. The last time the S&P 500 erased a 15% year-to-date decline in under six weeks was back in 1982. Sentiment has shifted, and investors are responding with renewed optimism as the US and China roll back tariffs.
The financial markets are used to high levels of volatility. As the tariff regime normalises, business will find a way for things to move forward. They will see the last few weeks as a wake-up call and not a disaster, despite the media noise.
Still, 10% tariffs from the world’s biggest consumer economy will have repercussions throughout the global supply chain. A global recession? Over the short and medium term, the likelihood is that both the US and the global economy will slow down but the probability of a global recession is now low. The momentum of the slowdown will determine the scope of any inflationary spike. Despite the media noise, there is little danger the Dollar will lose its global reserve status in the short to medium term. With all commodities priced in Dollars and the US Dollar involved in 88% of all currency transactions, an industry with a daily turnover exceeding $7.5 trillion a day, the Dollar is simply too omnipotent. However, the long end of the yield curve, where US mortgages live could run away if inflation and debt rise unchecked. However, with tariff rates coming down, trade deals being done and the US Federal Reserve staying cautious on US interest rate cuts, this too seems if not under control, at least not a runaway train.
What about the UK? The British economy is one of the most sensitive to shifts in global trade, so the UK is likely to see slower growth on the back of the new tariff regime while inflationary pressures continue to build.
Currency Exchange Rates Update
It’s been a decent, steady week for the pound with the recent positive news with the trade deals with India and the US supported by better-than-expected first quarter GDP data.
The Pound is up over 0.6% on the week and over 2.2% up in the last month against the Euro.
Against the US Dollar, the Pound is fractionally down by 0.18% on the week but 0.3% up over the last month.
This week, the key economic data releases include:
Monday Eurozone Consumer Inflation
Tuesday Australia RBA (Reserve Bank of Australia) interest rate decision
Canada Consumer inflation
Wednesday UK Consumer inflation
Thursday UK PMI Manufacturing data
Eurozone PMI Composite
Germany IFO business sentiment index
Friday UK Nationwide House Price Data
UK Retail sales
Germany GDP data
What’s in the news?
The latest Freshwater Strategy/City AM poll of UK voters shows Nigel Farage’s approval ratings have climbed since his party’s success in the local elections, while Reform UK has surged ahead of Labour to top the latest survey.
Reform tops latest City AM poll as Farage’s approval ratings climb
Reform UK now tops the voting intention survey at 32%. Labour comes second on 22%, down 13% since their election victory last summer while the Conservatives are on 19%, just ahead of the Lib Dems on 15%.
The survey also shows that 43% of voters consider immigration to be a top priority, up 3% from last month and second only to reducing inflation and the cost of living.
The poll also reveals that 70% of voters think the UK is heading in the wrong direction.
It seems that British politics is currently in a state of considerable flux with the two-party system being completely reshaped. The rise of Nigel Farage and Reform now represents the most serious political insurgency since the rise of the Labour Party in the early twentieth century.
UK
Several members on the Bank of England’s Monetary Policy Committee have warned that sticky inflation could stall further interest rate cuts this year in marked contrast to current analyst expectations leading to the possibility that UK interest rates staying higher for longer.
Good news
The ONS (Office for National Statistics) reported that the UK was the fastest-growing G7 member in the first quarter of this year. The UK’s 0.7% growth in Q1 2025 beat Italy (0.3%); Germany (0.2%); France (0.1%); Japan
(-0.2%); US (-0.075% or -0.3% on an annualised basis); and the 0.4% growth forecast for Canada.
Britain’s exports to the US have hit their highest level in over two years, helping to boost growth and narrow the UK’s trade deficit. This suggests a rush of demand to import goods into the US before the new tariff regime kicks in.
Seventeen of the UK’s largest pension funds, including Aviva, Legal & General, and M&G, have signed up to the new Mansion House Accord, which aims to unlock £50bn for investments, with at least half directed towards British assets. The agreement doubles previous commitments made under the Mansion House compact, which allocated 5% of funds to private assets without a UK investment requirement. While the accord is voluntary, concerns persist regarding potential government pressure to mandate UK investments, which could affect returns for retirees. Scottish Widows, the Lloyds Bank’s pension arm, opted out of the accord arguing that the company was already heavily invested in the UK and investment decisions would continue to be guided solely by returns instead of geography. The Treasury anticipates that pension portfolios will grow to £740bn by 2030, potentially providing £50bn for private market investments, with £25bn aimed at UK projects.
UK Pension Giants Sign Mansion House Accord to… | Morningstar
New data from Barclays show British households increased their spending in April, driven by warm weather and the long Easter weekend. Consumer card spending rose by 4.5% year-on-year, marking the largest increase since June 2023. Non-essential spending surged by 5.1%, the highest rate in nearly two years.
A report by TheCityUK suggests financial services are an international investment magnet and the principal engine for UK economic growth in the years after the UK left the European Union, injecting £281bn and accounted for around 2.5m jobs into the UK economy. Productivity levels, or output per hour in financial services is nearly three times as high as that generated by the whole economy.
Not so good news
The OBR (Office for Budget Responsibility), the fiscal watchdog, believes the UK economy will stagnate this year with UK economic growth coming in at 1% in 2025.
The BoE (Bank of England) revised their economic outlook to come in line with the OBR’s projection, describing a spike in growth for the first quarter as “erratic” due to greater manufacturing output, underlying GDP growth is likely to be closer to zero.
The IMF (International Monetary Fund) has taken a marginally more positive view on the UK economy, forecasting UK GDP would rise by 1.1% in 2025, down from its previous projection of 1.6% growth.
The CIPD (Chartered Institute of Personnel and Development) reported a significant decline in employers’ expectations for increasing headcount, with the net difference falling to just 8, the lowest level outside the pandemic since 2014. The report highlights that only 32% of private sector employers anticipate staffing increases in the next three months, while 24% plan redundancies.
A separate survey by KPMG and REC (Recruitment and Employment Confederation) indicates a weakening demand for staff, particularly in the south of England, where permanent staff appointments have decreased sharply. The engineering sector is the only area showing improved demand, while nursing and retail face the steepest declines.
The ONS (Office for National Statistics) unveiled fresh labour market data including wage growth and employment levels. Employment levels deteriorated in March in signs that Chancellor Rachel Reeves’ £20bn tax raid on employers has squeezed firms’ profits. The ONS data reveals that the number of payrolled employees fell by 53,000 over the first quarter of 2025. The early estimate of payrolled employees for April showed a decrease by 33,000. Signs that inflation may remain sticky in the months ahead were also represented by high levels of annual pay growth excluding bonuses, which hit 5.6% in the three months to March.
USA
The US and China agreed to suspend most tariffs on each other’s goods in a move that shows a thawing of trade tensions between the world’s two largest economies. The deal means “reciprocal” tariffs between both countries will be cut from 125% to 10%. The US 20% duties on Chinese imports relating to fentanyl will remain in place, meaning total tariffs on China stand at 30% and Chinese tariffs on US imports to 10%.
Treasury Secretary Scott Bessent said he expects to meet once again with representatives from Beijing in the “next few weeks” to iron out a bigger agreement.
US annual headline inflation fell from 2.4% in March to 2.3% in April with core inflation steady at 2.8%.
April retail sales showed signs of pre-emptive buying ahead of tariffs fading following March’s spending surge. Meanwhile, a subdued PPI (Producer Price Index) suggests that companies are absorbing higher costs, though this may not be sustainable.
The Empire State and Philadelphia Fed manufacturing surveys signalled worsening business conditions but higher new orders, hinting at slight expansion despite pricing pressures.
Credit ratings agency Moody’s has downgraded the US credit rating, citing the growth in government debt and brings Moody’s in line with its rivals. The decision to lower the US credit profile would be expected, at the margin, to lift the yield that investors demand in order to buy US Treasury debt to reflect more risk, and could dampen sentiment toward owning US assets, including stocks.
The EU
Eurozone industrial production grew 4.7% in the first quarter of 2025, the strongest outside of the post-lockdown rebound in 2020, boosting GDP growth to 0.4%. A key driver was US frontloading of European goods ahead of Trump’s tariffs, particularly in pharmaceuticals, where production rose by 23.2%. However, with the Liberation Day tariffs now in effect, demand for Eurozone exports is set to weaken, casting doubt on whether this surge is sustainable.
The markets have revised ECB rate expectations, with 85% odds on a 5 June rate cut as policymakers seek to counter tariff pressures on growth.
Germany’s business leaders have a message for the country’s new government. It’s time to deliver, calling on the new administration to step up and honour campaign promises, warning against a “lazy summer” for the new administration.
David Beckham. He’s so famous, he even has a tax law named after him. Enacted in 2004, the law meant that those living in Spain were only taxed on income earned in Spain. The idea is to offer a reasonable tax environment to reap the economic rewards of their presence and activity. It meant non-residents were taxed at a flat rate of 24% instead of the top marginal rate of 43%. It was a tax regime designed to lure talent. It seemed that the Spanish government grasped the fundamental principle of attracting wealth creators rather than punishing them. This legislation was a clear admission that a welcoming tax regime could indeed lure foreign talent and, crucially, generate tax revenue that might otherwise be lost. The policy worked too. Spain repeatedly features in the top ten of favourite countries for the British to emigrate to.
As Bob Dylan sang, ‘The times they are a-changing’. The socialist Spanish government led by prime minister Pedro Sánchez, has started a campaign against those benefiting from Beckham’s law. Through the STA (Spanish Tax Authority), you may receive notification that you are under investigation. Then you can be told that your status has been revoked, or sometimes that it is illegitimate or fraudulent. Next, you might be informed that you owe vast sums of money to the tax authority. All the while, you may have to produce all manner of documentation, sometimes stretching back over a decade, or face further fines. Your personal and professional lives can be upended and your integrity questioned. Worse, there is no opportunity to appeal, unless you first pay the rather large fines. The STA can start legal proceedings against you to freeze your bank accounts, both in Spain and abroad. STA inspectors are paid a bonus for collecting increasing amounts of income tax.
As I suspect we will shortly find out in Starmer’s Britain, ultimately, a shrinking tax base just means more taxes for the rest of us.
Others
Australian jobs data was much stronger than expected with the April jobs report showing 89,000 new jobs, well above the 21,000 forecast and the March number also revised higher to 36,000. Additionally, the March-quarter wage price index rose 0.9% on the quarter, exceeding expectations of 0.8%, with annual wage growth climbing to 3.4%.
This jobs growth and wage acceleration data could influence the RBA’s next interest rate decision, making a rate cut less certain when the RBA meets this Tues
Quote
Cornelius Vanderbilt, nicknamed “the Commodore”, was an American business magnate who effectively transformed the geography of the US through inland shipping and railroads “There is no friendship in trade”
