It’s been a busy week in economics, politics and geopolitics with a raft of data in the US and UK, news on tariffs and the UK’s public finances, and overnight news of escalating tensions in the Middle East with Israel targeting Iran’s nuclear facilities.
The latest UK employment numbers and GDP data for April cast a shadow on the government’s narrative of an improving economy. In addition, the spending review renewed the focus on the perilous state of the UK’s public finances. The UK also hosted trade talks between the US and China, which reached a positive conclusion as China agreed to ease restrictions on rare earth exports. Meanwhile, higher tariffs failed to make much of an impact on the US inflation data for May – but it may be too soon to draw too many conclusions given the time lag for tariffs to feed into consumer prices.
On the breaking news of Israel targeting Iran’s nuclear program overnight, we have seen a significant jump in the oil price – after an initial 12% spike, Brent Crude is up 8% currently, the biggest one-day rise since Russia invaded Ukraine in 2022. Given Iran’s strategic location, the upside risks to the oil price are based around concerns over possible disruption to shipping in the Strait of Hormuz, through which around 30% of daily crude oil production passes. While there are alternative routes, the short-term disruption and ongoing elevated geopolitics risks around the Middle East means safe haven assets are in demand this morning.
UK Chancellor Rachel Reeves announced the conclusions of her spending review, which delivered few surprises on Wednesday but highlighted the limited resources available for day-to-day spending, not least when healthcare and defence spending priorities weigh increasingly heavily on the public purse. The government remained committed to long-term infrastructure and housing plans but neither will deliver short term growth, which means expectations are rising of yet another ‘black hole’ in the public finances come the Autumn Budget when growth and productivity estimates are likely to be revised lower. The IMF recently noted that no other country is so obsessed with small movements in the public finances and believes the focus on fiscal headroom is leading to poor decision making. The Liz Truss era, if 49 days can be called an era, still appears to weigh heavily on the government’s thinking and its determination to look credible on the public finances. Self imposed rules suggest no increases to the big four taxes – income, VAT, corporation and national insurance. The Prime Minister Keir Starmer spoke recently of his opposition to “taxing your way to growth”. A shortfall of around £20bn will likely require more creativity in the public finances, but changing the fiscal rules for the second time in 12 months may cause some credibility issues, which means tough (and unpopular) decisions on further tax rises may be needed.
April saw the UK economy shrink by 0.3%, the first contraction in six months and the largest monthly contraction in 18 months. This suggests that the momentum from a strong first quarter has stalled, with both the services and manufacturing sectors declining. There may be a small ‘hangover’ effect with Q1 boosted by front running of orders ahead of the implementation of trade tariffs by the US as evidenced by a surge in manufacturing in February that has subsequently unwound. Second quarter growth is expected to be just 0.1%; continued weak momentum will be an additional headache for the Chancellor given her fiscal headroom relies on a growing economy.
UK unemployment climbed from 4.5% to 4.6% in April, in line with expectations and up a full percentage point from recent lows, and the highest level since the Spring of 2021. Average earnings ex-bonuses were up 5.2% in 3 months to April vs 5.5% previously. HMRC payrolls declined 109,000 in May vs expectations of a drop of 20,000. The payrolls data is a relatively new data set which the ONS says remains at the “development stage” and has seen substantial revisions in the past. All the same, the data set has not shown any positive growth in payrolls since last summer. The longer running Labour Force Survey (LFS) has also been subject to scrutiny for the quality of the data, but the ONS says recent improvements in both data collection and sampling methods make the LSF more representative in suggesting a more positive picture of around 200,000 more people in employment than last August. The ‘inactivity level’ – the percentage of working age people not employed nor looking for a job fell to 21.3% from 22% at the peak in 2023 – this still equates to 9.1 million people. The UK labour market, faced with headwinds from both low growth and higher payroll taxes, is clearly softening, which in time should see wage pressures decline. A ‘soft landing’ for the labour market should allow for further gradual rate cuts from the Bank of England so long as inflation eases as expected later in the year.
In the US, the employment and inflation data has been making headlines. The US added 139,000 jobs in May, ahead of expectations of 126,000. The unemployment rate was unchanged at 4.2%. Average jobs gains for the year so far are 124,000 per month, compared with 168,000 per month in 2024. This suggests a gently cooling labour market, but nothing to cause alarm at the Federal Reserve. US inflation climbed less than expected in May with CPI at 2.4% YoY vs 2.3% previously and 2.5% expected. This was the fourth month in a row that inflation was below expectations. Core CPI was unchanged at 2.8% vs 2.9% expected. There was a limited impact from tariffs so far with core goods, the most impacted inflation element seeing only a minor tick up.
There tends to be a lag of at least three months before tariff hikes are passed on so it’s a little too soon to draw conclusions over the impact of tariffs on the data. The Financial Times noted that the 20% tariff on washing machines in 2018 took around three months to impact pricing. Given the spike in inventories ahead of tariffs, many goods on sale during the month would have been imported before tariffs kicked in. Tariffs themselves were at a lower rate as well – 10% for most of the US’s trading partners but a substantially higher rate for China, albeit for only part of the month. It is also worth noting the Bureau for Labour Statistics, who compile the data, have seen staffing shortages meaning some CPI components were calculated using “alternative estimation” methods. Declines in airfares, clothing and vehicle prices were offset by increases in household furnishings and supplies and recreation commodities including toys. Motor vehicle parts saw a notable increase. Despite the President’s protests, there is no reason for the Fed to change policy right now – neither inflation or unemployment are indicating a need for any action and with plenty of uncertainty ahead, it makes sense for the Fed to ‘wait and see’ over the summer and hope for a little more clarity by September.
On tariffs, we saw more evidence on the impact on trade with China releasing their export data for May, which showed the biggest monthly fall in exports to the US since the start of the Covid pandemic. Exports to the US fell by 34% in US dollar terms, following a 21% fall in April. Overall exports were still up 4.8% year on year thanks to increases in export to Asia and the European Union, with exports up 14.8% and 12.0% respectively year on year.
We did see positive headlines from the US-China trade talks that took place in London earlier this week as a result of the telephone conversation between President Trump and President Xi Jinping last week. Details are somewhat vague, but China has agreed to open up and fast track licences for rare earth exports, a move that will ease supply chain stresses across the US and Europe. The US promised to honour commitments to allow Chinese students to attend US universities. Trump posted on social media that “our deal with China is done” adding that China would supply rare earths and magnets “up front”. Trump also spoke of “55% tariffs” on China, which can be broken down to the 10% baseline tariffs, 20% related to fentanyl production related and (up to) 25% from the pre-existing 2018 tariffs. The Wall Street Journal reported that China has put a six month limit on rare earth export licences, thus creating a ‘window’ for companies elsewhere to build up reserves in case the six month limit is imposed. It seems China is very much aware of how much power it holds through its dominance of global rare earth production, and this is a very useful negotiating tool which can be wielded against the US in the future if needed.
President Trump says he intends to send letters to trading partners in the next 1-2 weeks setting unilateral tariffs rates, ahead of the 9 July deadline when the pause on reciprocal tariffs ends. Trump said “at a certain point we’re just going to be sending letters out… and I think you understand that, saying this is the deal, you can take it or leave it”. However, 9 July is unlikely to be the end of the story, not least because some negotiations, such as with the European Union, may not be wrapped up by then. We also have the legal process ongoing, and this week saw the US Federal Appeals Court rule that the tariffs announced in April can remain in place while it reviews a lower court ruling that blocked the ‘Liberation Day’ levies. This ruling extends the earlier, temporary reprieve. The court set a date of 31 July to hear arguments in the case. This means the wide-ranging tariffs imposed as a result of the “national emergency” under the International Emergency Economic Powers Act will remain in place for now, and also that the legal issues around the case will extend beyond the 9 July deadline when the ‘pause’ in reciprocal tariffs is due to end.
It is certainly shaping up to be an uncertain period given whether it’s the UK’s public finances, the US tariff rate, which countries will secure preferential tariff rates, the impact of tariffs on inflation, and the legal arguments around tariffs themselves are not set to deliver much clarity in the short term. This may mean that, much like the Fed, certain markets may be in something of a ‘wait and see’ phase until we see a little more policy clarity and evidence of how much an impact these tariffs are really having.
Source: Columbia Threadneedle Investments as at 13 June 2025
