UK Economy Shrinks Unexpectedly in Blow to Rachel Reeves

Economic

Summary:

ONS data showing 0.1% fall in GDP in January comes less than two weeks before chancellor’s spring statement

The UK economy contracted by 0.1% in January, dealing a blow to Rachel Reeves before the spring statement later this month.

In a surprise to City economists, who expected 0.1% growth in January, the Office for National Statistics data showed the services sector failed to offset a decline in the industrial sector and maintain growth from the previous month.

Manufacturing output fell by 1.1% in January 2025, reversing a spurt of 0.7% in December last year. Construction was another drag on the economy after poor winter weather held back housebuilders.

Services increased by only 0.1%, with falls in hospitality and arts and entertainment making the biggest dent in growth.

The ONS said GDP was estimated to have grown by 0.2% in the three months to January 2025, compared with the three months to October 2024, as a result of the growth in the services sector.

Yael Selfin, the chief economist at KPMG UK, said: “The UK economy starts the year on the back foot as global uncertainty casts a shadow on the outlook.”

Reeves blamed global economic uncertainty for the downturn, adding that a plan to increase defence spending would give the economy a lift.

She said: “The world has changed and across the globe we are feeling the consequences. That’s why we are going further and faster to protect our country, reform our public services and kickstart economic growth to deliver on our plan for change.

“And why we are launching the biggest sustained increase in defence spending since the cold war.”

The shadow chancellor, Mel Stride, said: “It is no surprise that growth is down again, following near no growth in the last three months of 2024.”

Stride said the budget last October had hit businesses’ confidence. “After consistently talking Britain down, raising taxes to record highs and crushing business with their extreme employment legislation, this government is a growth killer,” he said.

Most business surveys have indicated that companies are putting a freeze on hiring workers and delaying investments to conserve funds. Government spending projects have also faced delays while ministers review plans put forward under the previous Conservative government.

The chancellor is expected to announce deep cuts in government welfare spending at the spring statement on 26 March to stay within the government’s budget rules. In December the economy expanded by 0.4%, helping the last quarter of the year to register a 0.1% rise and avoid two quarters of zero growth.

The Bank of England’s rate-setting monetary policy committee is forecast to be unmoved by the latest figures when it meets next week. Financial markets expect interest rates will be kept on hold at 4.5%.

The National Institute of Economic and Social Research (Niesr) has forecast that the economy will grow by 0.4% in the first quarter of 2025, much higher than the Bank, which has estimated growth will be limited to only 0.1%.

After the lacklustre performance in the second half of 2024, growth remains fragile because of global and domestic uncertainty.

Hailey Low, an economist at Niesr, said: “It is crucial that the upcoming spring statement provides stability rather than adding to domestic uncertainty. Frequent policy U-turns risk undermining business and investor confidence at a time when clarity and consistency are most needed.”

Source: Theguardian

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Warren Takunda

Economic

Gold prices reached a new high on Thursday, with gold futures at Comex surging 1.5%, briefly surpassing a new milestone of $3,000 (€2,764) per ounce for the first time in history. Spot gold prices jumped 1.9% to $2,988 (€2,752) per ounce, making another all-time high.

Gold is seen as a typical haven asset, with its prices rising more than 13% this year amid risk-aversion sentiment, a weakened US dollar, and increasing central bank purchases.

Haven demand surges

Demand for safe-haven assets surged amid economic and political uncertainties surrounding Trump’s tariffs and rising geopolitical tensions. The global economic outlook has darkened due to escalating tit-for-tat tariff threats between the US and other countries.

US President Donald Trump imposed blanket 25% tariffs on steel and aluminium imports, triggering retaliatory measures from Canada and the EU. He also threatened to impose a 200% tariff on EU wine and other alcoholic beverages in response to the bloc’s plan to tax American whiskey imports. While the widening trade war is expected to fuel inflation, higher trade barriers and deglobalisation could slow global economic growth.

A deepening trade conflict may further exacerbate inflationary pressures while weakening economic growth, creating the conditions for stagflation—a scenario historically favourable for gold as a store of value.

US dollar weakens

Additionally, a weakened US dollar and expectations for a sooner Federal Reserve rate cut also fuelled gold’s rally. The US Dollar Index (DXY), which measures the value of the US dollar relative to a basket of major foreign currencies, has declined more than 5% from its yearly high in mid-January.

Concerns about the US economy are likely to lead to lower interest rates, and recent cooler-than-expected inflation data has reinforced market expectations for a rate cut in June, rather than the previously projected September. The dollar may continue to weaken against other G10 currencies as investor sentiment shifts. However, this trend may not persist if the Federal Reserve maintains a hawkish stance, as escalating trade tensions could exacerbate inflationary pressures.

Meanwhile, the euro’s rally has also weighed on the US dollar, amid optimism surrounding a potential fiscal policy shift within the European Union, prompting investment flows away from US markets.

Central banks may shift away from US Treasuries

Central banks have been increasing their gold reserves while reducing holdings of US government bonds. Trump’s tariffs and fiscal policies aimed at reducing the government deficit have raised concerns about the US’s ability to service its debt.

“Trump's trade and tax policies are driving flows into gold as central banks look to shift reserves away from Treasuries, while there are fears about the rising US debt load and the US economy's ability to service it,” Kyle Rodda, a senior market analyst at Compital.com, wrote in an email.

Investors move into defensive mode as risk assets slump

Investment funds have rotated away from riskier assets such as equities and energy towards defensive assets, including gold, amid mounting concerns about global economic growth.

Risk-sensitive assets, including stock markets and crude oil, continued to decline. Investors have also been withdrawing from US equity markets, particularly large-cap technology stocks, over the past month due to growth concerns. The S&P 500, the benchmark US stock index, has entered correction territory for the year, falling 10% from its all-time high in February. European stock markets are also expected to end the week lower due to spillover effects from Wall Street.

Crude oil prices remain near multi-year lows due to a deteriorating demand outlook, while ceasefire talks could see Russian production return to the market. Benchmark crude futures, including West Texas Intermediate (WTI) and Brent, have fallen 7% and 8% respectively this year, nearing their lowest levels since December 2021.

Source: Euronews

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ING

Economic

Haven demand, trade war concerns boost gold

Gold just topped $3,000/oz for the first time ever. Tariff concerns that risk higher inflation and slower economic growth are spurring demand for safe-haven assets like gold.

Yesterday, US President Donald Trump threatened to impose a 200% tariff on wine, champagne and other alcoholic beverages from France and elsewhere in the EU. This followed immediate retaliations from the EU and Canada after the White House implemented 25% tariffs on steel and aluminium imports earlier this week. We see uncertainty over trade and tariffs continuing to buoy gold prices – and if trade tensions intensify and we see more retaliatory measures, safe-haven demand for gold will continue.

Gold is one of the best-performing major commodities this year, up more than 14% year-to-date. It has hit a series of consecutive record highs along the way, driven by trade frictions, central bank buying, and inflows into ETF holdings. Total known gold exchange-trade fund holdings have grown by around 3.5moz so far this year to almost 86.4moz. Central banks bought 1,045 tonnes last year, accounting for about a fifth of overall demand (according to the World Gold Council) and more purchases are likely to continue this year. If we see more additions, this will give bullion prices a further tailwind. We believe more gains for gold are in sight.

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Warren Takunda

Economic

Global stocks caught some much-needed relief on Friday after a week of heavy battering, momentarily putting aside worries over trade wars when top U.S. Senate Democrat Chuck Schumer signalled his party would provide the votes to avert a government shutdown.

Traders reacted quickly to send stock futures higher: Nasdaq futures jumped more than 1% while S&P 500 futures climbed 0.8%, relatively big moves for Asian hours.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1%.

Europe similarly looked set for a strong opening, with EUROSTOXX 50 futures gaining 0.3% and DAX futures tacking on 0.5%.

The market's touchiness towards news that had rarely stirred much reaction in the past suggested just how jittery investors had become.

"If you're already in a haunted house and you're already rattled, then every little mouse will scare you," said Vishnu Varathan, Mizuho's head of macro research for Asia ex-Japan.

In recent years markets have been largely unfazed by headlines surrounding U.S. government shutdowns, given that lawmakers routinely pass temporary spending bills to keep the government operating while they finish their work.

But going into the week's end, global markets were reeling over fears of an impending U.S. recession and an escalating global trade war.

Morning Bid: Markets Come Up for Air but Tariff Threats Lurk_1

Stacked bar chart showing poll results on where Americans stand on tariffs

Traders in London will wake up to the release of UK growth estimates for January due early in Europe's day. Expectations are for the economy to have grown 0.1% on a monthly basis, a slight slowdown from December's 0.4%.

It's worth noting that Britain's relatively measured approach to U.S. trade ructions and the largely balanced trade position between the two have benefited the pound, which was on track for a second straight weekly gain.

Over in the U.S., the University of Michigan Surveys of Consumers will be the key item to watch on Friday, given how U.S. President Donald Trump's tariff salvos are rattling businesses and consumers alike.

Meanwhile, Chinese equities have emerged as an unlikely sanctuary for global investors seeking shelter from all the uncertainty in the United States.

Hong Kong's Hang Seng Index is up 17% since Trump returned to the White House in January, compared with a drop of about 9% in the S&P 500.

Morning Bid: Markets Come Up for Air but Tariff Threats Lurk_2

Since the start of the year, Hong Kong's Hang Seng has surged while S&P 500 has struggled.

Stocks in mainland China and Hong Kong surged again on Friday, led by consumer shares, after a northern Chinese city announced plans to boost birth rates. Investors are also awaiting a press conference next Monday by Chinese officials from the top planning agency and elsewhere for additional measures to enhance domestic consumption.

Key developments that could influence markets on Friday:

- UK GDP estimate (January)

- UK industrial output (January)

- U.S. University of Michigan Surveys of Consumers (March)

Source: Reuters

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Warren Takunda

Economic

UK economic output fell from 0.4% in December to -0.1% in January, according to new data from the ONS, disappointing market expectations for growth of 0.1%.

The miss in expectations triggered currency weakness, with the Pound-to-Euro exchange rate dropping to 1.1927 in the minutes following the release and the Pound-to-Dollar exchange rate falling to 1.2922.

Pound Sterling Drops on Surprise GDP Contraction_1

Above: GBP/EUR at one-minute intervals showing the post-release fall. | Investment Banks Are Downgrading Pound vs Euro – What does it mean for you?A wave of new forecasts suggests upside potential for the euro.

Over the three months to January 2025, GDP increased by 0.2%, largely driven by December's surprisingly strong showing.

The services sector, the economy's biggest, grew by just 0.1% in January 2025, following a 0.4% rise in December 2024.

"Recession starts here," says Nicholas Hyett, Investment Manager at Wealth Club. "Services too has slowed dramatically, particularly in sectors like accommodation and food services which expect to be hit hard by higher living wage and employer national insurance contributions in April."

January's weakness was concentrated in production, which fell by 0.9% in January 2025, reversing a 0.5% increase in December 2024. Manufacturing output declined by 1.1%, primarily due to drops in basic metals (-3.3%) and pharmaceuticals (-3.1%).

Mining and quarrying fell by 3.3%, mainly due to a 3.7% decline in crude petroleum and natural gas extraction.

Construction output was also disappointing, with a decline of 0.2% recorded in January 2025, the same as in December.

Pound Sterling Drops on Surprise GDP Contraction_2

The data is probably not weak enough to shift the dial on next week's Bank of England interest rate decision, which should result in interest rates being left unchanged.

Given this, we would expect weakness in Pound Sterling to be relatively shallow.

"The 0.1% contraction in GDP adds to the growing pressure on the Bank of England to reduce the base rate. However, it’s unlikely to be enough to trigger an immediate rate cut next week. Inflation remains the key concern, and the Bank will want to see sustained progress before acting. However, this latest economic weakness could shift expectations for a summer rate cut," says Jamie Elvin, Director at Strive Mortgages.

The GDP figures will disappoint Chancellor Rachel Reeves, who desperately needs growth to pick up in order to keep the public finances on an even keel.

Reeves is expected to announce spending cuts at next week's spending review as faltering growth and rising debt costs leave her with a growing black hole in the finances.

Spending reductions and April's looming tax hikes will weigh on growth, which points to another lacklustre year ahead for the economy.

Employer taxes and the minimum wage rise in April, which will heap pressure on UK businesses. More stringent hiring regulations are also being pushed through by the Labour government, making employment more rigid and less appetising for business owners.

"Downside growth risks remain from the potential for a softer labour market and an uptick in inflation. And rising global trade tensions could also keep business investment on the sidelines," says Ben Jones, CBI Lead Economist.

Source: Poundsterlinglive

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Michelle

Commodity

SINGAPORE (March 14): Oil prices rebounded on Friday to recover some of their losses of more than 1% in the previous session, partly due to the diminishing prospects of a quick end to the Ukraine war that could bring back more Russian energy supplies.

Brent crude futures rose 64 cents, or 0.9%, to US$70.52 a barrel by 0748 GMT after settling 1.5% lower in the previous session. US West Texas Intermediate crude CLc1 was at US$67.26 a barrel, up 71 cents, or 1.1%, after closing down 1.7% on Thursday.

Russian President Vladimir Putin said on Thursday that Moscow supported a US proposal for a ceasefire in Ukraine in principle, but sought a number of clarifications and conditions that appeared to rule out a quick end to the fighting.

"Russia's tepid support of a 30-day ceasefire proposal with Ukraine has reduced confidence around a ceasefire in the short term," IG market analyst Tony Sycamore said.

"The feeling is that US won't lift sanctions until they agree a ceasefire."

Raising pressure on Russian President Vladimir Putin to come to a peace agreement over Ukraine, the Trump administration said on Thursday that a license allowing energy transactions with Russian financial institutions expired this week.

Chinese state firms are also curbing Russian oil imports on sanctions risks, sources told Reuters.

However, the global trade war that has roiled financial markets and raised recession fears is escalating with US President Donald Trump on Thursday threatening to slap a 200% tariff on wine, cognac and other alcohol imports from Europe.

The International Energy Agency warned on Thursday that global oil supply could exceed demand by around 600,000 barrels per day this year, due to growth led by the United States and weaker than expected global demand.

"The macroeconomic conditions that underpin our oil demand projections deteriorated over the past month as trade tensions escalated between the US and several other countries," the IEA said, prompting it to revise down its demand growth estimates for the fourth quarter of 2024 and the first quarter of 2025.

The Trump-driven trade war woes and demand worries dented oil prices on the previous day, though the possibility of less Russian oil in the global markets in the near term provided some cushion during Friday's trade.

"Most price projections were to the downside in the short term, but geopolitical tension could still cause supply disruptions," ANZ analysts said in a note to clients.

On Friday, China and Russia stood by Iran after the United States demanded nuclear talks with Tehran, with senior Chinese and Russian diplomats saying dialogue should only resume based on "mutual respect" and all sanctions ought to be lifted.

This comes a day after Washington stepped up sanctions, including on Iranian Oil Minister Mohsen Paknejad.

Source: Theedgemarkets

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Warren Takunda

Stocks

Shares in Europe and Asia advanced Friday, shrugging off another decline on Wall Street, with markets in China gaining after state-run banks and other financial institutions were ordered to do more to help spur more consumer spending.

Germany’s DAX rose 0.4% to 22,667.45, while the CAC 40 in Paris climbed 0.7% to 7,996.78. Britain’s FTSE 100 was up 0.4% at 8,577.97.

U.S. stocks looked primed for gains, with the future for the S&P 500 up 0.7% while that for the Dow Jones Industrial Average was 0.5% higher.

In Asian trading, Hong Kong’s benchmark jumped 2.1% to 23,959.98, while the Shanghai Composite index surged 1.8% to 3,419.56.

China’s National Financial Regulatory Administration issued a notice Friday ordering financial institutions to help develop consumer finance and encourage use of credit cards, do more to aid borrowers who run into trouble, and be more transparent in their lending practices.

Economists say China needs consumers to spend more to get the economy out of the doldrums, although most have advocated broader, more fundamental reforms such as increasing wages, social welfare and support for public health and education.

In Tokyo, the Nikkei 225 added 0.7% to 37,053.10, while South Korea’s Kospi slipped 0.3% to 2,566.36.

Australia’s S&P/ASX 200 gained 0.5% to 7,789.70, while Bangkok’s SET jumped 1.2%. The Taiex in Taiwan was nearly unchanged.

On Thursday, Wall Street’s sell-off deepened as President Donald Trump’s escalating trade war dragged the S&P 500 more than 10% below the record it set last month.

A 10% drop is big enough that professional investors have a name for it — a “correction” — and the S&P 500’s 1.4% slide on Thursday sent the index to its first since 2023. The benchmark index closed at 5,521.52.

“For now, traders are bracing for another round of policy-induced whiplash, knowing full well that in this environment, certainty is a luxury they won’t be getting anytime soon,” Stephen Innes of SPI Asset Management said in a commentary.

Adding to risks was a partial government shutdown that might ensue if Congress fails to pass its annual appropriations bill.

The losses came after Trump upped the stakes in his trade war by threatening 200% tariffs on Champagne and other European wines and alcohol, unless the EU rolls back a tariff on U.S. whiskey it imposed in response to U.S. tariffs on European steel and aluminum. Not even a double-shot of good news on the U.S. economy could stop the bleeding.

The Dow slumped 1.3%, while the Nasdaq composite fell 2%.

The dizzying swings for stocks result from uncertainty about how much pain Trump will let the economy endure through tariffs and other policies in order to reshape the country and world as he wants. The president has said he wants manufacturing jobs back in the United States, along with a smaller U.S. government workforce and other fundamental changes.

Measures of confidence in the economy for U.S. households and businesses have dropped due to uncertainty about which tariffs will stick from Trump’s barrage of on -again, off -again announcements. A pullback in spending that could sap vitality from the economy, and some U.S. businesses say they’ve already begun to see a change in their customers’ behavior.

Still, there was good news on the economic front.

One report showed inflation at the wholesale level last month was milder than economists expected, in line with an encouraging report a day earlier on consumer inflation.

A separate report said fewer U.S. workers applied for unemployment benefits last week than economists expected, suggesting the the job market is steady.

In other dealings early Friday, U.S. benchmark crude oil gained 90 cents to $67.45 per barrel, while Brent crude, the international standard, was up 85 cents at $70.73 per barrel.

The U.S. dollar rose to 148.93 Japanese yen from 147.82 yen. The euro slipped to $1.0851 from $1.0855.

Source: AP

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