UK Economy Shrinks by 0.3% as Exports Hit by Trump Trade War

Economic

Central Bank

Summary:

Worse than forecast April GDP data shows challenge facing Rachel Reeves to kickstart growth to fund spending review

The UK economy contracted in April by 0.3% as businesses cut jobs and cancelled investment plans in response to higher taxes and the uncertainty created by Donald Trump’s tariff war.

Figures from the Office for National Statistics showed the economy went into reverse after growing by 0.2% in March and 0.5% in February.

The reading, which was the worst monthly drop since October 2023, overshot City economists’ expectations of a 0.1% contraction.

Services suffered after a change to stamp duty rates in England and Northern Ireland that led to a sharp drop in house sales. The hit to estate agents, conveyancing lawyers and other property industry businesses helped push the services sector down by 0.4%.

Liz McKeown, an ONS director of economic statistics, also pointed to the £2bn drop in exports – the largest monthly decrease since records began in January 1997 – after the introduction of Trump’s “liberation day” tariffs.

“After increasing for each of the four preceding months, April saw the largest monthly fall on record in goods exports to the United States with decreases seen across most types of goods,” she said.

Manufacturing dropped by 0.6% after the car industry cut production, most likely in response to the US 25% levy on auto imports. Pharmaceutical production, which grew earlier in the year, also dropped back in April as the threat of tariffs loomed.

The construction industry was the only bright spot, rising by 0.9% after an increase in housebuilding starts.

The GDP data is a blow for the chancellor, Rachel Reeves, coming only a day after she laid out plans to grow the economy in a three-year spending review, and will disappoint ministers keen to show they have improved the UK’s outlook.

Reeves blamed “uncertainty about tariffs” for much of the contraction, saying on Sky News: “We know that April was a challenging month … one of the things, if you dig into [the] numbers today, is exports weakening and also production weakening because of that uncertainty in the world around tariffs.” UK Economy Shrinks by 0.3% as Exports Hit by Trump Trade War_1

UK Economy Shrinks by 0.3% as Exports Hit by Trump Trade War_1

The chancellor added that the figures for April were “disappointing, but also perhaps not entirely unexpected”, given global economic uncertainty.

McKeown said there were also signs that the higher levels of activity in February and March had been down to companies bringing forward sales to beat US import tariffs.

Elliott Jordan-Doak, the senior UK economist at the consultancy Pantheon Macroeconomics, described April’s contraction as a blip that was likely to be reversed in May, when Britain would return to its usual path of slow, steady growth.

He said the Bank of England, which halved its forecast for UK growth earlier this year, was “too downbeat on the underlying growth momentum and resilience of the economy”.

However, Paul Dales, the chief UK economist at Capital Economics, said the economy could also contract in May as the boost to activity in February and March from companies seeking to export to the US high import tariffs slowly unwinds.

Bank of England officials are expected to hold interest rates at 4.25% when they meet next week and then shave 0.25% from the cost of borrowing in August.

Dales said April’s drop “won’t prompt the Bank of England to cut interest rates next Thursday. But it is one more piece of news pointing to another cut in August”.

The figures also underscored concerns that an increase in employer national insurance contributions would harm the UK’s growth prospects.

Mel Stride, the shadow chancellor, accused Labour of “economic vandalism”. He said: “Under Labour, we have seen taxes hiked, inflation almost double, unemployment rise, and growth fall. With more taxes coming, things will only get worse and hardworking people will pay the price.”

The April figures also cover the period when employer national insurance contributions were increased, and will fuel claims that the tax rise is harming the UK’s growth prospects.

The latest jobs data from HMRC released on Tuesday showed the number of workers on company payrolls fell by 109,000 in May – the largest monthly fall since the same period in 2020 during the first Covid lockdown. More than 250,000 jobs have been lost in Britain since Reeves’s autumn budget.

Source: Theguardian

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Adam

Forex

China–U.S. Trade War

The dollar fell to the weakest level in three years amid worries over US tariffs and the outlook for the US economy.

The Bloomberg Dollar Spot Index slid as much as 0.8% on Thursday to the lowest level since April 2022. All Group-of-10 currencies rose, with the euro hitting its strongest since 2021.

The latest declines come on the heels of data that showed US producer price inflation remained muted in May, held down by tame goods and services costs. Earlier in the session, the dollar came under pressure as President Donald Trump said he would notify trading partners soon of unilateral levies.

The dollar is down more than 8% so far this year, as investors build up bets that Trump’s trade and tax policies will weigh on the economy. Wall Street strategists have been warning that the dollar has more room to fall, aligning themselves with speculative traders tracked by the Commodity Futures Trading Commission who hold some $12.2 billion of wagers tied to the dollar weakening further.

“Dollar weakness has much more room to run,” said Vasileios Gkionakis, senior economist and strategist at Aviva Investors. He added the greenback’s weakness despite rising yields show eroding investor confidence in US assets.

The dollar’s decline spilled into the currency volatility market, reinforcing the inverse correlation between the greenback and hedging costs recently. Demand was particularly pronounced in the one-week tenor, which captures the Federal Reserve’s June 18 policy meeting.

What Bloomberg strategists say...

“Trader pricing still favors more Federal Reserve interest rate cuts, although the precise timing flips around depending on the prevailing investor mood. But what is consistent is the US dollar ploughing a path to the downside as FX trader convictions firm.”

Source: Bloomberg

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Adam

Forex

EUR/USD Technical Analysis

The euro has exploded to the upside in the early part of Thursday as an ECB official has said that monetary policy is stable. And that suggests, of course, there won’t be any more cuts. That has had the euro break significantly above the 1.15 level. And if we can keep up this type of momentum, we should see that drag it higher. On the other hand, if we break back down below the 1.15 level, that would be a very ugly turn of events. We do have a couple of announcements coming down to the United States later in the day that could cause a little bit of volatility, though, so do keep that in mind.

USD/JPY Technical Analysis

The US dollar has dropped pretty significantly against the Japanese yen, but we are still in the middle of overall consolidation. So, while it is an ugly candlestick and we did form a couple of shooting stars a couple of days before, it is just more of the same. I still look at the 142 yen level as a major support level. And at that point in time, I would expect to see buyers come back to support the market. If we were to break down below there, then we may see a move to the 140 yen level, but right now we’ll have to wait and see. I don’t necessarily look at this as a market that I would like to short. I want to continue to look for long, but right now we just don’t have the proper momentum.

AUD/USD Technical Analysis

The Australian dollar has turned around during the trading session after initially falling. The Aussie dollar has been a little bit of a lackluster currency over the last several weeks, but it has been grinding slowly higher. So, with that being the case, it’s not a huge surprise to see that there were buyers willing to step in and pick up at the dip.

The 50 day EMA looks as if it is going to break above the 200 day EMA and with that being said, the so-called golden cross could be kicking off. The 0.6550 level above being broken would be a very big signal that we are going higher. And we did try to do it during the Wednesday session, but we gave it back. And now it looks like we’re going to continue to bounce around in this same area, probably hanging on every word coming out of the US and Chinese trade talks.

Source: fxempire

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Warren Takunda

Economic

The EU is wrangling over a provision of Donald Trump's so-called "Big Beautiful Bill" for the US budget that could see European companies taxed higher than others in retaliation for certain taxes imposed on US enterprises overseas, the vice-chair of the European Parliament’s tax subcommittee has told Euronews.

The German European People's Party MEP Markus Ferber said the European Commission has raised the proposed legislation—already approved by the House of Representatives—in ongoing tariff negotiations with the Trump administration.

“We are concerned because within this ‘One Big Beautiful Bill’ there are special taxes aimed at jurisdictions that impose taxes on the US,” Ferber told Euronews.

He added that jurisdictions like the EU, which have already implemented the OECD agreement establishing a global minimum tax of 15% on multinationals, are directly targeted.

“It could also affect member states that have introduced a digital services tax,” he noted.

The OECD agreement, approved by 140 countries - though as yet unratified by the US - introduced a global minimum tax of 15% on the profits of multinational companies, regardless of where those profits are declared, with effect from 1 January 2024. The EU has transposed the agreement into law and applies it to multinationals operating within the Union, to the ire of the Trump administration.

Meanwhile countries such as Denmark, Portugal and Poland have implemented digital services taxes targeting US tech giants, while others are in the process of creating one.

The US is now looking to retaliate against taxes it deems unfair through a provision of the "Big Beautiful Bill” which would hit foreign investors with a bump in US income tax by five percent points each year, potentially taking the rate up to 20%, in addition to existing taxes.

The Commission is concerned, officials said.

According to Ferber, the EU executive has put this provision of the US budget bill on the negotiating table. “But we are not sure yet that the US agreed to put it in the basket,” the MEP said.

For several weeks, the EU and the US have been discussing a resolution to the trade dispute that has been ongoing since mid-March.

The US impose 50% tariffs on EU steel and aluminium, 25% on cars and 10% on all EU imports.

For its part, the EU has prepared countermeasures targeting around €115 billion worth of US products. These measures are either suspended until July or still awaiting approval by EU member states.

Source: Euronews

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Michelle

Economic

Forex

British goods exports to the United States suffered a record fall in April after U.S. President Donald Trump imposed new tariffs, official figures showed on Thursday, pushing Britain's goods trade deficit to its widest in more than three years.

Britain exported 4.1 billion pounds ($5.6 billion) of goods to the United States in April, down from 6.1 billion pounds in March, Britain's Office for National Statistics said, the lowest amount since February 2022 and the sharpest decline since monthly records began in 1997.

The 2 billion pound fall - a 33% drop in percentage terms - contributed to a bigger-than-expected drop in British gross domestic product in April.

Last week Germany said its exports to the United States fell by 10.5% in April although that figure, unlike Britain's, is seasonally adjusted.

The British Chambers of Commerce said the scale of the fall partly reflected manufacturers shipping extra goods in March to avoid an expected increase in tariffs. Even so, April's goods exports were 15% lower than a year earlier.

"The economic effects of the U.S. tariffs are now a reality. Thousands of UK exporters are dealing with lower orders and higher supply chain and customer costs," the BCC's head of trade policy, William Bain, said.

The United States is Britain's largest single goods export destination and is especially important for car makers, although total British exports to countries in the European Union are higher.

Britain exported 59.3 billion pounds of goods to the United States last year and imported 57.1 billion pounds.

The United States imposed 25% tariffs on British steel and aluminium on March 12 and in early April increased tariffs on imports of cars to 27.5% as well as a blanket tariff of 10% on other goods.

Last month Britain agreed the outline of a deal to remove the extra tariffs on steel, aluminium and cars - the only country to do so - but it has yet to be implemented and the 10% tariff remains in place for other goods.

Before the deal, the Bank of England estimated the impact of the tariffs on Britain would be relatively modest, reducing economic output by 0.3% in three years' time.

BIGGER TRADE DEFICIT

Thursday's data also showed that the fall in exports to the United States pushed Britain's global goods trade deficit to 23.2 billion pounds in April from 19.9 billion pounds in March, its widest since January 2022 and nearly 3 billion pounds more than had been expected by economists polled by Reuters.

Excluding trade in precious metals, which the ONS says adds volatility to the data, the goods trade deficit was the widest since May 2023 at 21.6 billion pounds.

Source: Yahoo Finance

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Adam

Stocks

China–U.S. Trade War

Here are five key things investors need to know to start the trading day:

Data dump

All three major stock averages closed lower on Wednesday despite news of a U.S.-China trade agreement and better-than-expected inflation data. The S&P 500 sank 0.27%, snapping its three-day win streak, while the Nasdaq Composite lost 0.5% and the Dow Jones Industrial Average

dropped just 1.1 points. The consumer price index increased 0.1% in May — less than the Dow Jones forecast of 0.2% — putting the annual inflation rate at 2.4%. Investors will get another read on inflation on Thursday with the producer price index, due at 8:30 a.m. ET. Crude oil futures, meanwhile, climbed more than 4% on Wednesday amid increasing tensions between the U.S. and Iran. Follow live market updates.

Air India crash

An Air India Boeing Dreamliner bound for London Gatwick Airport crashed on Thursday shortly after taking off in western India, local officials and the carrier confirmed. The plane was carrying 242 passengers and crew, and the cause of the crash wasn’t immediately clear. “The injured are being taken to the nearest hospitals,” Air India said in an X post. The flight was operated by a Boeing 787 Dreamliner that was delivered to Air India in 2014, according to flight-tracking site FlightRadar24. “We are aware of initial reports and are working to gather more information,” Boeing said in a statement. Shares of the planemaker were down more than 7% before the bell.

90+ days

Treasury Secretary Scott Bessent signaled on Wednesday that the 90-day pause on reciprocal tariffs could be extended for 18 of the United States’ “important trading partners” who are “negotiating in good faith.” Testifying before the House Ways and Means Committee, Bessent said “it is highly likely” that the U.S. would “roll the date forward to continue good faith negotiations” with those countries. The Treasury chief’s comments marked a new tone out of the White House: Trump officials had so far not suggested that they’d be open to extending the 90-day tariff pause announced April 9 without “terms of an agreement” in hand. Meanwhile, Commerce Secretary Howard Lutnick told CNBC’s “Money Movers” on Wednesday that U.S. tariff levels on China will not change, even though a framework trade agreement between the two countries has yet to be finalized.

Cloud prophecy

Oracle beat Wall Street’s top- and bottom-line estimates for the fourth quarter on Wednesday, sending shares of the software maker 8% higher after the bell. Revenue for the quarter totaled $15.9 billion, the company said, an 11% increase from the same period last year. CEO Safra Catz indicated that Oracle’s cloud growth will accelerate. On an earnings call with analysts, she said that cloud infrastructure revenue should increase more than 70% in fiscal 2026. Catz also called for more than $67 billion in revenue in the next fiscal year, above the LSEG consensus of $65.18 billion.

Chiming in

Online banking services provider Chime priced its IPO at $27 per share on Wednesday — above the expected range — ahead of its Nasdaq trading debut set for Thursday. The offering values the company at $11.6 billion, a big step down from its last private valuation of $25 billion in 2021. Chime’s decision to go public will test investor appetite for consumer-facing finance companies starting to hit the market, following a multi-year freeze in the IPO pipeline. Shares of eToro popped 29% after the trading platform debuted on the Nasdaq in May, and stablecoin issuer Circle soared 168% after its New York Stock Exchange debut last week.

Source: cnbc

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Warren Takunda

Economic

U.S. wholesale prices rose modestly last month from a year earlier, another sign that inflationary pressures remain mild.

The Labor Department reported Thursday that its producer price index — which measures inflation before it its consumers — rose 2.6% in May 2024. Producer prices rose 0.1% from April to May after dropping 0.2% the month before.

Excluding volatile food and energy prices, wholesale costs were up 0.1% from April and 3% from May 2024.

The readings were slightly lower than economists had forecast.

Wholesale energy prices were unchanged, although gasoline prices rose 1.6% from April after falling the month before. Food prices at the wholesale level ticked up 0.1% after dropping 0.9% in April. Egg prices, volatile because of the bird flu, rose 1.4% following 39.3% drop in April; they are up 125% from May 2024.

The report came out a day after the Labor Department said that consumer prices rose a modest 0.1% last month from April and 2.4% from a year earlier.

Since returning to the office, Trump has rolled out 10% tariffs on nearly every country in the world as well as specific levies on steel, aluminum and autos. Importers in the United States pay the taxes and pass them along to consumers via higher prices when they can. For that reason, economists expect inflation to pick up later this year.

So far, his tariffs don’t seem to have had much of an impact on prices overall

Wholesale prices can offer an early look at where consumer inflation might be headed. Economists also watch it because some of its components, notably health care and financial services, flow into the Federal Reserve’s preferred inflation gauge — the personal consumption expenditures, or PCE, index.

Inflation began to flare up for the first time in decades in 2021, as the economy roared back with unexpected strength from COVID-19 lockdowns. That prompted the Fed to raise its benchmark interest rate 11 times in 2022 and 2023. The higher borrowing costs helped bring inflation down from the peaks it reached in 2022, and last year the Fed felt comfortable enough with the progress to cut rates three times.

But it has turned cautious this year while it waits to see the inflationary impact of Trump’s trade policies. The central bank is expected to leave rates unchanged at its meeting next Tuesday and Wednesday.