UK GDP underperforms as US markets regain composure

The UK economy started 2025 on a weak note and could not maintain the momentum of December. GDP in January slipped to -0.1% on a MoM basis, while the 3 MoM rate expanded slightly to 0.2%. The UK economy is flatlining at best, and this report does not consider the market turmoil since President Trump entered the White House.

Industrial and manufacturing production data was extremely weak at the start of this year. This weas driven by a notable fall in oil and gas extraction, and construction continued to have a weak few months. The service sector was the one ‘bright’ spot, after a strong month for retail, especially food and drink sales as people stayed in and ate at home, according to the ONS.  There are some signs that the service sector could come under pressure in February. The Office for National Statistics’ Opinion and Lifestyle survey for February, found that more people reported that their living costs had increased or stayed the same last month, the direct debit failure rate increased 2% compared to January, and Revolut reported a 6% decline in debit card spending in Feb, due to a sharp decline in services spending.

This could be a sign that retail sales may falter in February, we get the next retail sales report on 28^th Feb.  Overall, the UK economy is flatlining at best and if economic data does not pick up in February and March, then we could be on track for a negative quarter of growth in Q1.

US markets are in recovery mode on Friday and futures are rising for now. This could be in reaction to 1, some tariff fatigue after another week of scattergun tariff policies from the White House, and 2, the S&P 500 is on track for its second week of a 3%+ loss, which is extremely rare, and could lead to some buying pressure on Friday.

European equities start to price in tariff risks

It also looks like European equities have finally started to price in the prospect of tariffs this week, which could be a turning point. The Eurostoxx 50, the Cac 40 and the Dax index have all fallen 3% or more in the past 5 trading sessions, which is on par with the S&P 500. After outperforming US indices since the start of this year, is this a sign that Trump’s tariff threats could finally be weighing on Europe’s asset prices?

The ECB President Christine Lagarde warned that President Trump’s decisions could hurt economic growth, and a trade war would have ‘severe consequences’ for the global economy. We may see key global figures stand up to President Trump  in the coming weeks, although it is hard to know if this will have a moderating influence on him. Yesterday Trump threatened a 200% tariff on European alcohol imports to the US, if the EU follows through on tariffs on American whiskey exports. This weighed heavily on European drinks manufacturers, and Pernod Ricard fell nearly 4%.

Christine Lagarde said that the EU had no choice but to retaliate to the US’s tariff threats, but she said that negotiations could still take place.  Likewise, on Friday morning, the BMW CEO is also talking about tariffs. His company will not be exempt from Trump’s 25% tariff threat on autos that are not made with at least 75% of US-made components. However, he sounds sanguine, and has said that any tariffs could be short lived as he delivers the company’s latest results this morning. BMW’s stock price was one of the weakest on the German market on Thursday and fell 2.3%.

Hopes of US avoiding a government shutdown fueling brighter mood for equities

Stock market futures may be rallying on the back of hopes that the US Congress will pass a spending bill and avoid a government shutdown on Saturday. This is also boosting the dollar yet again. USD/JPY is at its highest level for a week, after falling to its lowest level since October. Yen weakness has been driven by reports that the BOJ will hold interest rates at its meeting next week, even though there are signs that seasonal pay rises are well above inflation and could push price growth higher in the coming months. Rates in Japan are expected to hit 1% later this year, before the BOJ embark on a prolonged pause.

Headline risk dominates

Overall, headline risks dominate. If President Trump manages to avoid the urge to tariff someone or something today, then stocks could end the week in recovery mode. The University of Michigan confidence data is worth watching later today, ahead of Monday’s retail sales data, which should give us a good read on the strength of the US consumer. In the short term, momentum is on the upside for the US dollar and EUR/USD and GBP/USD are both backing away from key resistance levels.  Gold is also retreating on Friday, after a strong run this week. The oil price is higher, and both Brent and WTI have managed to eke out gains this week, which is a sign that the commodity market may be more sanguine about the economic impact of Trump’s tariffs compared to equity markets.