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Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 18/02/2025.

How could U.S. tariffs impact Europe?

“Tariff is a beautiful word. It’s a great word. It’s a word I like.” – U.S. President Donald Trump

President Trump loves tariffs. Not just that, but in a contrast to standard economic understanding, he described trade wars as “good” and “easy to win”.

When he first took power in 2017, the U.S. visible goods deficit was about $770bn per annum. When he left office, it was $880bn, an increase of 3.4% per annum over the duration of his first term (most of which would have related to inflation). At the end of 2024, the deficit had risen to $1.2tn.

Understanding tariff economics

Back in 2016, when the suggestion of rolling back decades of progress in reducing tariffs began to be taken seriously, economists pointed out that their research found few long-term links between tariffs and trade balances. It seems implausible that raising the price of an imported good wouldn’t lead to a drop in demand for that good, and indeed, that’s typically the case in the short term. However, this trend doesn’t hold over the long term. Why?

Economics is complex and sometimes struggles to conform to scientific analysis. We can’t perform experiments or have control samples on economies and so conclusions should be viewed with scepticism. That complexity means that when you change one thing, many other things may change as a result.

In the case of tariffs, the most obvious resulting change is a retaliatory tariff. There’s also a reaction in the currency market. If Americans buy fewer imported goods because of tariffs, they use less foreign currency, which can make the U.S. dollar stronger. That stronger dollar makes imports cheaper and exports more expensive. The tariff might apply to a particular good, but the exchange rate adjustment applies to all goods. So, you would expect to see an improvement in the balance on the tariffed good but a smaller deterioration in the balance on all other goods.

What’s the point of tariffs?

The point of the tariff might be to encourage consumers to switch suppliers. They may do so, but not necessarily to a domestic supplier.

Another reason might be to persuade the supplier to relocate its manufacturing. Again, it may do so, but not necessarily to within the U.S.

Since the U.S. imposed tariffs on Chinese imports, America’s bilateral trade deficit with China has improved. However, America’s overall trade deficit hasn’t improved because non-Chinese imports have taken the place of Chinese imports. Perhaps this is the reason that President Trump had been discussing imposing tariffs on all imports. That would limit the ability of consumers and suppliers to switch to other non-U.S. jurisdictions to avoid the tariff.

However, it’s still unlikely to be beneficial.

America has a low rate of unemployment. It arguably has very little spare capacity. And so, for Americans to displace the activities of importers, they would likely need to stop doing other things.

Under free trade, America’s educated and largely skilled workforce produces higher value goods and services than those it imports. So, the effect of the tariffs would be expected to be inflationary, but not necessarily productive. Indeed, since many imports are components that end up in exported products, there’s widespread belief the tariffs would lead to increased prices and reduced growth.

Recent data seemed to support the notion that the U.S. labour force is currently highly employed. The working age labour force participation rate is relatively high, and inflation has remained persistent.

In last week’s Consumer Price Index (CPI) report, most measures of inflation showed some persistence, which makes cutting interest rates very difficult. Federal Reserve Chairman Jay Powell seemed to endorse this message in his testimony to Congress.

EU and UK at risk due to high VAT rates

Last week, President Trump seemingly shifted his stance from imposing universal tariffs on all imports to focus on reciprocal tariffs — those imposed in response to tariffs from other countries on U.S. goods. Most of these countries are emerging markets with higher average tariffs on U.S. imports.

However, last week’s memorandum from President Trump specified that he believes that value added tax (VAT) is effectively a trade restriction.

In many countries that have a VAT, imports from the U.S. would be subject to it, while exports to the U.S. would receive a VAT refund. Despite studies indicating that VAT doesn’t impact trade balances, President Trump and his adviser Peter Navarro don’t subscribe to conventional economic analysis. The Secretary of Commerce has now been tasked with reviewing the effects of tariffs and VAT rates on U.S. trade in order to develop recommendations for U.S. import tariffs by 1 April.

Without knowing exactly how they’ll reach their judgements, it seems likely the EU and UK could appear to be imposing some of the highest tax rates on imports from the U.S. (should they be evaluated by those standards). This is the case despite the UK having a relatively balanced trade relationship with the U.S.

Research indicates that tariffs don’t cause lasting adjustments in trade deficits, which are more influenced by differences in competitiveness. The U.S. has a trade deficit because its wages are much higher than those in other regions, making production more costly.

While tariffs may encourage more domestic manufacturing, this could also lead to less affordable products due to higher production costs. The U.S. already receives significant investment from abroad, which effectively mirrors the trade deficit it runs. However, as President Trump encourages further investment, he inflates the U.S. dollar and makes its exports less competitive.

Trimming the fat

There are some actions being taken by the U.S. administration that may help curtail the deficit.

If Elon Musk’s initiatives at the Department of Government Efficiency are successful, they could reduce U.S. government borrowing. The trade deficit reflects America’s ability to spend beyond its means and reducing borrowing is key to closing this gap. The typical times when this happens is during recessions, when you normally see an improvement in America’s balance of trade.

There are things other regions could do as well…

They could improve their own investment appeal. If, by doing so, they were able to divert some U.S. investment into say Europe or the UK, that would help to restore some of America’s export competitiveness.

Fundamentally, there are ways to improve the U.S. trade deficit, yet most of them would be associated with lower domestic demand and higher investment in trade partners. This doesn’t really seem aligned with the administration’s goals, and it seems unlikely they’d be particularly popular.

Please continue to check our blog content for advice, planning issues and the latest investment market and economic updates from leading investment houses.

Charlotte Clarke

19/02/2025

Please see the below article from EPIC Investment Partners detailing their thoughts on the technology sector in China. Received this morning 18/02/2025.

“This photo taken yesterday of Jack Ma shaking hands with Premier Xi Jinping is perhaps THE most important photo that I have seen in China in the last 5 years!!” 

Jefferies’ Janet Harbison. She is not wrong.

Four years after launching a regulatory crackdown that plunged the technology sector into turmoil (and saw the Asia ex Japan region index fall over 40% from the February 2021 high to the October 2022 low), the Chinese leader sat down publicly on Monday with Alibaba co-founder Jack Ma. 

Alibaba and subsidiary Ant Financial, whose IPO was cancelled in late 2021, bore the brunt of that campaign.

Xi delivered a speech after hosting Ma, Meituan’s Wang Xing and Xiaomi’s Lei Jun. Also present were Wang Xingxing (head of robotics startup Unitree), DeepSeek’s founder Liang Wenfeng and Huawei Technologies founder Ren Zhengfei among others. All key players in China’s technology sector.

The technology sector already accounts for some 15% of GDP and is likely to overtake the housing market within the next few years.

The focus was clearly intended to offer Government support and assistance for China’s rapidly developing technology sector but it has much broader and very positive ramifications for domestic consumption. The technology companies are, broadly speaking, domestically orientated and this is part of a bigger push to encourage households to consume.

Household savings are, as we have pointed out in previous notes, nothing short of MASSIVE. Unlocking this savings pool will see domestic consumption surge thus underpinning growth in the world largest economy (in purchasing power parity terms).

This is a game changer. Hold on to your hats.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

18/02/2025

Please see below, this week’s Monday Digest from Tatton Investments Management:

Europe First?

A dramatic week in global politics ended with Chinese and European stocks outperforming the US, the dollar falling back and gold prices soaring. This unusual constellation of trends points to economic sentiment re-evaluation – and perhaps declining confidence in in US institutions.

US consumer inflation unexpectedly increased, pushing back expectations of the next Federal Reserve interest rate cut. The retail sales data was better pointed to decreasing inflation pressure, but the Fed will be nervous about sticky inflation. That coincided with investment flows out of the US. The longer this goes on – especially for big tech stocks – the more likely it will trigger negative momentum trades. US investors are less buoyant, but this hasn’t yet spread to consumer confidence. Inflation and government disruption could change that, though.

European stocks benefitted massively remarkably – even though Donald Trump’s negotiations with Putin are considered a nightmare scenario by European politicians. Investors see an end to the war as good for Europe, and recognise that growth is already improving. Higher European defence spending could support growth further, since it will have to come out of fiscal expansion. This applies to the UK too, even though the Office for Budget Responsibility (OBR) removed Rachel Reeves’ fiscal headroom and while she promised discipline regardless. Reeves will be aware that OBR forecasts came before last week’s rate cut, and surprisingly positive Q4 growth.

Rallying gold prices could be a sign of investor fears. One explanation for this – explored last weekend in the FT by Nobel-prize-winning economist Daron Acemoglu – could be declining faith in US institutions. Anecdotally, we are hearing that wealthy Americans are concerned about Trump moving fast and breaking things. 

These concerns might mean higher gold demand, a weaker dollar and US bond yields moving above elsewhere. If we squint, we can see those trends now, but it’s too early to say and they can be explained by many factors. Still, long-term investors should not dismiss the signs altogether.

China’s stars align

Investors have turned positive on China again – with Hong Kong stocks up 16% over the last month. It’s worth remembering how negative China sentiment was as recently as September, when many deemed the sluggish economy “uninvestable”. The government’s autumn stimulus promises stemmed the capital outflows and boosted domestic stocks, but Beijing’s record on demand-side stimulus has been mixed since. That is unsurprising, given the communist party’s ideological focus on production. Chinese stocks went sideways into the end of 2024, as the fundamental problem remained: will the party allow them to profit over the long-term?

Low-cost AI DeepSeek at least shows where profit could come from. Chinese tech stocks rallied 25% over the last month, following an apparent “Sputnik moment” in the US-Chinae tech race. A key part of shaking the “uninvestable” label is that domestic Chinese seem happier to invest in their own stocks. The old savings model relied on unstable shadow banking and an inflated property market, and it seemed that the government wanted to make property less attractive while encouraging equity ownership. That may beis happening, but it still remains to be seen whether profits get locked up by Beijing or sanctioned by Washington. 

It helps that the communist party wants to lead the tech race and won’t want to upset the investment flows it needs to do so. That has eased investors’ concerns about capital controls, and so too has the fact that Trump seems much more concerned with trade imbalances than geopolitical rivalry. The signs are looking good for Chinese stocks – but optimism should be tinged with caution. Trump might not care about geopolitical rivalry but many in his orbit care deeply. President Xi may allow tech profit for now but this could turn the moment big tech clashes with the party’s priorities. For western investors, Chinese optimism should always be cautious. 

Will tariffs work?

Donald Trump likes to threaten tariffs as a negotiating tactic, but he clearly thinks they are viable policies too. Economists usually disagree, but the case against tariffs isn’t as simple as sometimes presented. 

The tariff question is the one that began modern economics. Leaders used to think that international trade was zero sum, but Adam Smith – the father of classical economics – argued trade could be mutually beneficial. David Ricardo underpinned those arguments with theory, and critiqued Britain’s corn law tariffs in the 19th century. Smith and Ricardo’s ideas still underpin free trade organisations like the WTO today, but pro-tariff arguments have always been around. The most common is the idea that tariffs protect infant industries. US President William McKinley used this to argue for sky-high tariffs at the turn of the 20th century. Trump is so fond of McKinley that he (re-)named Alaska’s a highest mountain after him. 

The WTO maintains that tariffs are universally bad, but even they acknowledge the ‘infant industry’ argument and make allowances for developing countries. Empirical evidence suggests tariffs damage a country’s long-term economic output, but that they can also boost short-term production and growth. You can’t really apply this infant industry argument to the US, though; it’s the largest economy in the world. 

Still, the output argument probably misses the point of Trump’s tariffs. Voters favoured them because globalisation hasn’t rewarded the average citizen – even if it’s boosted aggregate profits and output. Trump doesn’t wants to address this discontent without old-school redistribution, which might upset the capital-owning winners of globalisation. But trade barriers will curtail growth and, in the end, hurt capital owners and steelworkers alike. What’s more, trade protectionism tends to create the conditions for oligopoly, rent-seeking and corruption. Trump doesn’t seem to be worried about those social effects, but they might be the real legacy of his tariffs.

Please continue to check our blog content for advice, planning issues and the latest investment market, and economic updates from leading investment houses.

Andrew Lloyd

17/02/2025

Please see the below article from EPIC Investment Partners received this morning 14/02/2025:

The United States is once again contemplating new tariffs, yet a focus solely on headline trade surpluses obscures a more complex reality. While deficits grab attention, the strategic importance of industries and global supply chain roles are equally critical in Washington’s tariff calculus.

Vietnam, for example, presents a paradox. Its 2024 trade surplus with the US surged to $123.5 billion. As a vital manufacturing hub for apparel, electronics, and footwear – a key alternative to China – sweeping tariffs could disrupt crucial supply chains, a move Washington may deem self-defeating despite the headline deficit.

Taiwan, with a $73.9 billion surplus, is similarly shielded by strategic necessity. Its semiconductor sector, dominated by TSMC, underpins the US tech ecosystem. Tariffs here risk economic and political shocks, outweighing any perceived benefit from addressing the trade imbalance alone. Mutual dependency in high-tech may discourages tariffs based on trade balances alone.

Conversely, nations where the US runs a trade surplus appear more secure. The United Kingdom, with an $11.9 billion surplus for the US in 2024, benefits from robust American exports in financial services, travel, and machinery. The deep-rooted alliance between London and Washington also makes punitive tariffs improbable.

Saudi Arabia, despite its oil exporter image, now sees a slight trade surplus in favour of the US thanks to increased American machinery and high-value goods exports. Its geopolitical significance further diminishes tariff risk.   

Latin American partners like Panama, Colombia, and Chile also illustrate strategic insulation. Panama, under a trade pact, reliably imports US petroleum and machinery. Colombia, a security ally, trades in refined petroleum and agriculture. Chile, with a free trade agreement, exchanges copper and fruit for US machinery. For these nations, allowing the US to maintain influence in Latin America, amidst Chinese economic expansion, combined with the fact that the US runs trade surpluses will likely work to their advantage.   

In the final analysis, trade deficits are a simplistic starting point. Strategic dependencies, geopolitical imperatives and favourable trade balances all reshape the tariff equation. While nations with US surpluses currently seem insulated, the volatile nature of trade policy means no country can be entirely sanguine about their long-term exposure. Ultimately, in the unpredictable world of Trump’s trade policies, logic alone offers limited reassurance.

Please continue to check our blog content for advice, planning issues and the latest investment market, and economic updates from leading investment houses.

Andrew Lloyd

14/02/2025

Please see the below article from Brewin Dolphin, providing a brief analysis of the key factors currently affecting global investment markets. Received last night – 11/02/2025

It seems investors may have to get used to weekend bombshells. The week before last, it was the announcement that the U.S. would impose an additional 10% tariff on imports from China, while imports from Mexico and Canada would be subject to 25% tariffs, taking effect within days. The additional curbs on China are unwelcome, but as a large internal market, it’s not overly sensitive to individual country restrictions. For Canada and Mexico, on the other hand, these additional costs would risk pushing the countries into recession.

However, these tariffs would also result in increased costs for the U.S. Tariffs would cause prices to rise, discouraging consumption and weighing on growth. They’d bring in revenue, but whether that revenue would be reinjected into the economy would depend on tax policy negotiations in Congress. Higher prices would mean a higher rate of inflation, although it would likely be a one-time increase rather than a steeper inflationary trajectory.

Will tariffs be universal?

After much anxiety swept through the financial and corporate communities, U.S. President Donald Trump delayed the imposition of these tariffs following telephone calls with their respective leaders. Nominally, he extracted concessions, although most offerings had already been pledged.

Last weekend, the goal posts seemed to move again. President Trump revealed he would be imposing a 25% tariff on all steel and all aluminium imports. Back in 2018, he imposed 25% tariffs on steel imports and 10% tariffs on aluminium imports before exempting certain countries (Canada and Mexico) as part of the renegotiation of NAFTA (the North American Free Trade Agreement). Some of these tariffs were also commuted to quotas. The new tariffs will apply universally, and the aluminium tariff rate has risen. Although Trump announced there will be no exceptions, he is reportedly considering making one for Australia.

The moves reflected an environment where leaders seem compelled to take bold action. This is a contrast to the Washington consensus era, in which policymakers attempted to get out of the way of the economy wherever possible.

While in the UK…

The Bank of England (BoE) cut interest rates, which was expected. However, the big surprise was the fact that Monetary Policy Committee (MPC) member Catherine Mann (who was once regarded as the most hawkish member of the Committee) joined Swati Dhingra in voting for a sharper rate cut of 0.5%. New MPC members are always something of an unknown quantity. When Catherine Mann joined, she was expected to be quite dovish but turned out to be a hawk. This evidence shows that rather than having a particular tilt, she is pragmatic but decisive with her actions.

In justifying their decision, the MPC had a number of complex issues to juggle, tariffs being one of these. There are a few ways in which tariffs could impact growth and inflation. Growth would clearly be weaker if the U.S. imposed tariffs, however the MPC saw as many reasons to expect weaker inflation as it did strong inflation.

Another quandary was the impact of last year’s increase in employer’s National Insurance contributions. Logically, these taxes will need to be paid through a mixture of companies charging more, paying staff less or earning less profit. The BoE surveyed businesses on this and found that the most popular response was lower wage growth and reduced employment. This suggesting, tentatively, that the tax increase could be disinflationary.

Overall, the MPC acknowledged that the neutral rate of interest seems to have risen over recent years. The main empirical evidence for this would be the softening labour market.

U.S. labour market remains strong

The U.S. released its employment report on Friday, which suggested its labour market remains strong. Substantial positive upward revisions to previous months made up for a slight disappointment in terms of the first estimate for January. Wage growth picked up more than expected, so overall, the U.S. labour market justifies a pause in rate cuts from the Federal Reserve (the Fed).

DeepSeek and the Magnificent Seven

Most of the Magnificent Seven have reported earnings now. Nvidia, to build the drama, doesn’t report until 26 February.

Amazon and Google (Alphabet) reported this week. They both saw strong growth in cloud services but were held back by capacity constraints, which echoed Microsoft’s results from the week before. Microsoft emphasised shortages of space and power over central processing units and graphics processing units. Amazon said most of the $26bn on capital expenditure in Q4 was to build artificial intelligence (AI) capability at Amazon Web Services. Google is anticipating spending $75bn over the coming year.

The companies seem unphased by the release of the DeepSeek model, believing, as we discussed last week, that more efficient models will increase adoption of AI rather than reducing demand for AI infrastructure. Amazon’s CEO described AI adoption as a once-in-a lifetime business opportunity, which the company is expanding its capacity to fill.

What’s next?

This week, the focus will be on Fed Chairman Powell, who will be delivering testimony to the U.S. Congress on Tuesday. This isn’t normally a market-moving development, however the Chairman being in the spotlight may prompt President Trump to make one of his unorthodox comments on the appropriateness of monetary policy or policymakers.

There will be a host of earnings numbers due, but with two thirds of companies having now reported, shocks seem less likely.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Alex Kitteringham

12^th February 2025

Please see the below article from EPIC Investment Partners received this morning 11/02/2025.

Trump’s announcement of a 25% tariff on steel and aluminium imports from all countries, with implementation expected “almost immediately,” has sparked significant concern. The US remains heavily dependent on metal imports, particularly aluminium, which accounted for over 80% of domestic demand in 2023, with major suppliers including Canada and Mexico. These tariffs are anticipated to substantially impact the automotive, aerospace, and energy industries, which rely heavily on these specialised metals. 

The international response has been swift and critical. The Canadian Steel Producers Association condemned the tariffs as “baseless and unwarranted,” whilst the European Commission pledged to protect European businesses, workers, and consumers. South Korea’s Ministry of Industry, Trade, and Energy held an emergency meeting with steel executives, and Australian Prime Minister Anthony Albanese sought exemptions, citing Australian investments in the US steel industry. Following discussions with Albanese, Trump indicated he would give “great consideration” to exempting Australia from the tariffs. 

The economic implications are far-reaching. The manufacturing sector is particularly vulnerable, with studies showing that steel-consuming jobs far outnumber steel-producing jobs, suggesting likely net job losses. Higher tariffs will increase production costs for manufacturers, raising prices for goods ranging from cars to household appliances. Analysts warn of heightened inflationary pressures, which could reduce consumer purchasing power and slow economic growth. 

Academic research has been overwhelmingly critical of such policies. A Chicago Booth survey, conducted in 2018, of 43 economic experts revealed that none believed steel and aluminium tariffs would improve American welfare. The Tax Foundation’s analysis suggests these tariffs have in fact consistently damaged the US economy and American consumers, by raising prices, and lowering economic output and employment since the trade wars began in 2018.   

The imposition of high tariffs can also appreciate the value of the US dollar, making American exports less competitive and further worsening trade imbalances. Furthermore, tariffs disrupt global supply chains, increasing inefficiencies and limiting the benefits of international trade. Overall, while tariffs might offer short-term protection for certain industries, they can have far-reaching negative impacts on both consumers and businesses, ultimately slowing down broader economic growth. 

Separately, credit agency Moody’s has warned that US withdrawal from international organisations could threaten the triple-A ratings of institutions like the World Bank. This comes as Trump ordered a review of US government support for intergovernmental organisations, potentially leading to withdrawal from certain United Nations agencies, with Moody’s cautioning that reduced US commitment to multilateral development banks could have negative credit implications. 

Please continue to check our blog content for advice, planning issues and the latest investment market, and economic updates from leading investment houses.

Charlotte Clarke

11/02/2025

Please see the below article from Tatton Investment Management on the potential impact of Trumps tariffs, a review of asset returns and the Bank of England rate cuts. Received 10/02/2025

Up and down and on and off
The week began with, potentially, a very distasteful pill to swallow. Trump announced another 10% of tariffs on China and new 25% tariffs on Mexico and Canada, the US’ closest and single largest trading partners. 

Markets fell on the news but without a sense of panic and then turned, following a pause in the tariff introduction to March after Mexico and Canada offered concessions on border control. China, announced countermeasures but limited to minor imports. 

This first bout of nation tariff bullying looked extreme, such as the 25% levies on Mexico and Canada, but will likely reduce if a deal can be stuck. Analysts predict further general tariffs of 10% on China, with Canada and Mexico’s tariffs dependent on a renegotiated USMCA (US-Mexico-Canada Agreement), probably concluding sometime next year, dependent on Trump’s assessment of delivery on his agenda. 

However, Trump has today announced planed tariffs of 25% on all steel and aluminum imports to the US. Mexico and Canada are two of the US’s biggest steel trading partners, with the latter being the biggest supplier of aluminium to the US.

Analysts are split on the impact of tariffs: Goldman Sachs predict a 0.5% rise in US inflation without significant growth impacts, however, the US Tax Foundation looks to Trump’s first term where tariffs reduced US GDP by 0.2%, and employment by 142,000 jobs. Potentially larger tariffs and higher consumer prices could complicate the Federal Reserve’s ability to cut rates further.

Despite all the noise, markets ended the week broadly flat, with non-Trump news having more impact.

All of the Magnificent 7 except for Nvidia have reported earnings and investors seem to be disappointed with the results. DeepSeek has made investors more sceptical that AI dominance needs enormous investment that only the largest companies can deliver. However, US big tech disappointment was offset by US mid-cap and smaller-cap companies that are finally showing some earnings growth.

Away from the US, the Bank of England’s announced a welcome rate cut, taking the Base Rate from 4.75% down to 4.5%. Fears remain over falling near term growth and inflation and if correct, the economy is on a weaker path and a small rate cut will not create much benefit. 

Still, the FTSE 100 moved to new highs after the rate decision, suggesting investors believe a general improvement even if it’s difficult to say that any one thing is great. Let’s hope so.

January asset returns review
The new year began with significant attention on Donald Trump’s influence on global markets. Despite policy uncertainty and fears, equity markets remained stable, with Europe (ex-UK) equities showing the best returns. Trump’s tariff threats initially raised inflation fears, but later hints suggested a more gradual approach. US stocks performed well, with smaller companies outpacing larger ones.

In late January, the AI sector was shaken by DeepSeek, a Chinese start-up, announcing a low-cost AI engine, impacting Nvidia’s market value. Nvidia’s loss affected major tech stocks, while smaller companies benefited from lower AI costs. Asian markets rose, despite initial declines in Chinese stocks due to tariff concerns.

Energy and commodity prices fluctuated, with oil prices spiking due to US sanctions on Russia. Bonds had a turbulent month but ended with gains, aided by declining yields and tightening credit spreads. Global inflation remained contained, with the US Federal Reserve pausing rate cuts, while the ECB continued to cut rates.

US economic sentiment remained positive, though tempered as Trump’s presidency began. Employment measures were strong, but businesses awaited new policies. In Europe and the UK, confidence data showed mixed signals, with manufacturing sentiment rising but overall confidence still deteriorating. China’s consumer confidence showed signs of improvement due to government subsidies, though the outlook remained uncertain.

Bank of England in a bind 
On Thursday, the Bank of England’s Monetary Policy Committee (MPC) cut the Bank Rate by 0.25% to 4.5% due to weaker-than-expected GDP growth and declining business and consumer confidence. The labour market was balanced, and there was sufficient progress on inflation and wages to justify the rate cut. The MPC maintained a meeting-by-meeting approach, expecting CPI to rise again but only briefly due to higher gas prices.

The vote to cut rates was seven to two for a cut. Catherine Mann, known for her hawkish stance, even voted for a 0.5% cut, due to weakened growth. Citibank Research forecasts 2025 UK real growth at just 0.5%, albeit the lowest among 54 forecasters.

The BoE expects headline CPI to fall to 2% by 2026 after rising to 3.7% by Q3 2025, acknowledging uncertainty about inflation rising from potential tariff trade wars. The MPC noting a decline in supply growth from 1.5% in early 2024 to 0.75% by Q1 2025. 

The BoE highlighted the importance of investment for the UK, observing that rising productivity would not offset a slowing labour force growth. Rates are expected to fall another 0.5% to around 3.75%, with a chance of further cuts towards 3%. Public investment is likely to benefit productivity in the long term, although current uncertainties make it difficult to gauge the exact impact.

Productivity gains may be achieved through technology rather than large-scale infrastructure, and artificial intelligence may yet be our saviour. Meanwhile, if Dr. Mann can be persuaded that faster rate cuts are necessary now, the chances that she will remain a dove must be reasonable and that may persuade those of a more dovish nature to lower rates more in the near future.

Please continue to check our blog content for advice, planning issues and the latest market, investment and economic updates from leading investment firms.

Marcus Blenkinsop

10/02/2025

Please see the below article from EPIC Investment Partners detailing their discussions on the latest HMRC changes addressing the long-standing issue of overtaxed pensions. Received yesterday 06/02/2025.

Pensioners, there is good news for you! The HMRC has announced changes that it hopes will help it address the long-standing issue of over-taxed pension withdrawals. These changes could mean that more money stays in your pocket, where it belongs.

In a bid to make the system fairer and more efficient, HMRC is introducing a number of changes that will help to reduce the incidence of over-taxation and to simplify the process of claiming a refund. One key improvement is going to be the replacement of emergency tax codes with accurate tax codes in real time. To do this, HMRC will work more closely with pension providers to share data, and as a result, the correct tax code will be applied as soon as possible. This way, retirees won’t have to worry about being overtaxed, especially if they make several withdrawals in a year.

Furthermore, when overpayments do occur, HMRC has promised to process the refund faster. This will help to reduce the impact of such errors on pensioners, who will not have to wait unduly for their money to be repaid.

To help pensioners, HMRC is asking people to take certain steps when making their withdrawals. These include ensuring that the correct tax code has been applied; checking the tax deductions on pension payments; and being prepared to claim a refund if necessary. In the event that people are overtaxed, the online tools, and simple forms provided by HMRC enable them to reclaim their overpaid amounts easily.

This shift shows HMRC is listening to pensioners and working to create a system that is fairer for everyone. It’s a step in the right direction, ensuring that your hard-earned savings support your retirement money and not sit in unnecessary tax payments.

Please continue to check our blog content for advice, planning issues and the latest market, investment and economic updates from leading investment houses.

Alex Clare

07/02/2025

Please see the below article from Brewin Dolphin on China’s economic outlook, received late yesterday evening:

With snakes symbolising renewal, agility and resilience in Chinese culture, Head of Market Analysis Janet Mui explores why the Year of the Snake is a critical period for China as it tackles economic challenges, technological advancements, and global competition.

A common saying has it that when China sneezes, the world catches a cold. As the world’s second largest economy, largest exporter, and largest commodity importer, its direct impact on the global economy has been significant over the past few decades. But is this influence set to change? Let’s take a look…

China’s prospects in the Year of the Snake

2025 is set to be a symbolic milestone for Chinese ambition and national pride.

Ten years ago, China unveiled a comprehensive industrial strategy named ‘Made in China 2025’ that aimed to transform China from a low-value manufacturing hub to the global leader in cutting-edge technology and innovation.

Fast forward to 2025 and China has largely succeeded – from its dominance in solar panels, electric vehicles and drones, to its advancements in artificial intelligence (AI), most recently through AI disruptor DeepSeek.

‘Made in China 2025’ has proven successful despite U.S. export restrictions, cementing China’s status as a leading strategic rival to the U.S. Now with the acceleration of AI development, the Year of the Snake presents an opportunity for China to evaluate its progress and set new goals for growth.

That said, China faces its challenges, most notably a deflating housing bubble. However, the country’s strong technological dividends – already integrated and enjoyed in everyday life – and its robust national infrastructure, provide a solid foundation for new growth drivers to emerge.

China’s challenges are wrapped in complexity

First, China must uncoil a complex set of challenges. These are both cyclical and structural, as well as domestic and international.

Domestic property

The elephant in the room is the struggling property sector, which has depressed investment and suppressed consumer confidence. Deflation (when prices keep going down) is a threat due to oversupply and a reluctance to spend, as people wait for prices to drop further. The housing market has a significant impact on confidence because if prices rise, owners tend to have more confidence to spend. While home prices and sales declines have stabilised, a sustained reduction in home inventory will take time. Demographic trends, such as a fall in household formation, also pose a long-term challenge to demand.

Consumer confidence

Critical to China’s renewal is confidence, particularly in the economy and job security – the latter being key to unlocking near-term spending power. However, young people face a tough jobs market and rising job insecurity, which threatens their income stability and reduces their desire to start families. This trend is underscored by the government’s decision to stop publishing youth unemployment data and the spread of the ‘lie flat’ attitude on social media; this involves young people putting in minimal effort at work.

Although the Chinese have great potential spending power due to a high savings rate, a reluctance to spend persists amidst falling property prices and economic uncertainty. Research from the People’s Bank of China has indeed shown an increased desire to save.

Tariffs

China must also contend with prominent external challenges, such as U.S. President Donald Trump’s imposition of additional 10% tariffs on Chinese products. The potential escalation in trade tensions between China and the U.S. will pose risks to China, but the threat may also prompt it to confront its domestic structural challenges head-on.

The complexity of these challenges demands patience. Despite government stimulus, it’s perhaps wishful thinking that things will turn rosy solely due to that. The view is that there needs to be some bolder and more creative fiscal policies in the Year of the Snake to harness growth and boost the confidence of businesses, consumers, and markets.

How will China untangle itself?

Just as snakes adapt to their surroundings, so must China’s policymakers, who will need to be agile in response to the shifting economic landscape.

A China-U.S. trade war could be damaging, but it could also hasten China’s shift towards a growth model that prioritises domestic consumption over a reliance on exports and investment.

China’s long-standing growth model of fixed investment via infrastructure and property is showing diminishing returns and is unsustainable. While the latest government stimulus package improves the supply and price of credit, the fundamental problem is inefficient capital allocation and risk aversion.

The Chinese authorities have long advocated for a shift in growth priorities to consumption, whose share in GDP (gross domestic product) remains much lower than other major economies. However, China’s cultural emphasis on saving and its limited social safety net, along with a lack of domestic investment options, has contributed to its high savings rate. 

The government’s current consumption support policies have focused on subsidies for upgrades like new white goods or electric vehicles, with limited success. New plans announced at the end of 2024 aim to provide more direct support to families with multiple children and those struggling with extreme poverty. However, markets remain unimpressed at the scale of these measures.

Amidst the crosscurrent of domestic and external headwinds, the risk of rising unemployment is high. The rapid pace of AI development and potential labour displacement could exacerbate uncertainty, threatening social stability and consumer confidence. This perfect storm of challenges may serve as a catalyst for China to take bold action.

Can the Chinese market get its bite back?

The tentative recovery of Chinese equity markets in 2024 was driven by stimulus. In 2025, markets will be looking for the right type of stimulus, like that boosting household consumption, and the recovery in economic data. A less aggressive tone from President Trump will also enable a more sustainable rebound. There’s a fair, but not high, probability that all of these may happen.

The Chinese equity market offers cheap valuations, making it an attractive diversifier against the U.S. market. As AI development progresses in China, investors may revive interest in Chinese tech companies that were previously battered by regulatory concerns. Although any potential upside should be balanced against the unpredictable regulatory and political risks.

As for Chinese government bonds, yields have slumped to record lows due to deflation risks and economic concerns. If the economy improves, yields should edge up in 2025. The Chinese authorities are also wary of potential volatility in the financial system, warning institutions not to over-invest in Chinese government bonds.

China may also allow for a more competitive exchange rate, but it will proceed with caution in managing the yuan’s depreciation, given the macroeconomic and trade risks.

How does China’s economy impact the UK?

As we’ve seen, China faces its challenges, and given the size of its economy, this could impact global markets, including the UK. Or perhaps not?

As China shifts towards self-sufficiency and less commodity-intensive growth, its direct impact on the world will wane in comparison to the last few decades.

Interestingly, despite negative sentiment on China, developed markets’ equity indices have performed well, with a few exceptions.

A return to confidence in China could boost global markets, particularly European equities. For example, Chinese activity drives some of the largest stocks in the EURO STOXX 50 index, such as consumer discretionary and industrial stocks.

For the UK, China’s data typically influences mining stocks, given China is the world’s largest industrial commodity importer. This relationship will likely hold, if not weaken slightly, as the driver of Chinese growth shifts more towards consumption from investment.

Selected UK banks, like HSBC, are also exposed to China. A large share of HSBC’s profits is derived from Chinese markets, and its exposure to the Chinese real estate sector is a source of concern for investors.

However, the UK is limited in its direct economic exposure to China, with only 5% of UK exports going to the country. For context, the UK actually exports more to Ireland than to China. This probably explains why the UK chancellor is keen to strengthen dialogue with Chinese officials and explore more bilateral trade opportunities.

Despite the UK’s limited direct exports to China, the country’s supply chains are highly interconnected with those of China. As a result, any shocks in China’s economy are likely to have an impact on UK manufacturers, particularly those in the automotive industry.

From lurking to striking in the AI race

Despite economic and domestic headwinds, the Chinese have a proven track record of innovation and adaptation. Today, it regularly boasts the highest number of STEM (Science, Technology, Engineering and Mathematics) PhD graduates each year. Together with bold stimulus action, it will be this innovation that helps steer China through its challenges.

China’s tech capabilities saw a ground-breaking AI development, DeepSeek, introduced at the turn of the Chinese New Year. The Chinese AI start-up has developed a robust open-source AI model at a fraction of the cost used to train its Western equivalent, ChatGPT. Its model also requires significantly less computing power to operate, making it a more efficient and cost-effective solution.

While the economics of DeepSeek have yet to be verified, the innovative technique to improve efficiency in training and inference has been applauded by top technology companies, including ChatGPT-maker OpenAI. DeepSeek’s unveiling has been a revelation in the global AI race, which begs the question, how did it happen?

Ultimately, China’s deprivation of high-end graphics processing units (GPUs) due to U.S. export controls forced Chinese AI developers to work with limited resources and constraints. This led to accelerated innovation and cost efficiency.

A year of several skins?

In the Year of the Snake, we can anticipate further reports on technological breakthroughs and transformations emerging from China’s robust ecosystem. This includes its strong STEM pool, vast data resources, extensive industrial facilities, and a culture characterised by determination, adaptability, and a rich history of innovation. Investors will undoubtedly keep a close watch on these attributes and developments.

Overall, the Year of the Snake is poised to be a time of renewal and agility for China, with potential for positive effects to ripple out to the global community.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Andrew Lloyd

07/02/2025