May monthly market update - Reflections on April 2025

After a shaky start to the month, easing inflation and signs of a softer US trade stance helped steady markets and restore investor confidence in April.

UK equities notched their best run in two years as the FTSE 100 rebounded strongly following a shaky start to the month, with concerns over the impact of US tariffs beginning to ease. Markets were initially rattled by the announcement of US trade tariffs on the UK, but sentiment improved as signals from Washington pointed to a softer stance.

In a boost for Chancellor Rachel Reeves, the UK economy grew by 0.5% in February, beating expectations. Service sectors such as computer programming, telecoms and car dealerships all had a strong month, while car manufacturing also picked up. Exports to the US also increased by more than £500 million as businesses rushed to beat the tariffs. Even so, global uncertainty and rising trade tensions continue to cloud the outlook.

UK inflation eased to 2.6% in March from 2.8% in February, offering some relief to households and businesses. With risks to the economy still present, markets now expect the Bank of England to cut interest rates in May, with possibly three more cuts to follow this year.

The jobs market is cooling. Vacancies fell to 781,000 in the first quarter, while payroll numbers also declined. Average pay rose by 5.9%, though recent increases to National Insurance and the minimum wage are likely to add pressure. The unemployment rate held steady at 4.4%.

The UK government also took control of Chinese-owned British Steel after emergency legislation was rushed through Parliament. The intervention aimed to prevent the owner, Jingye, from shutting down its two blast furnaces – an outcome that would have ended primary steel production in the UK.

US stocks rebound

US equities recovered after a volatile month, shaken by the fallout from President Donald Trump’s tariff policy. Bond markets were unsettled, with US Treasury yields jumping amid fears about the broader economic impact. Confidence returned after Trump announced a 90-day delay on higher tariffs for most countries, although duties on Chinese goods still rose by 145%. Meanwhile, the US dollar dropped to a three-year low after Trump escalated his criticism of Federal Reserve Chair Jerome Powell.

US economic growth slowed sharply in the first quarter of 2025, as businesses stockpiled goods ahead of the new tariff measures. GDP fell by 0.3% on an annualised basis, compared with a 2.4% increase in the final quarter of 2024.

US inflation dropped more than expected in March, easing to 2.4% from 2.8% in February. But economists warn prices may soon rise again as tariffs make imports more expensive. The Federal Reserve, which targets 2% inflation and full employment, faces a difficult decision: whether to cut rates to head off a slowdown or hold firm to keep inflation in check.

The US jobs market remains strong, despite federal workforce cuts. Employers added 228,000 jobs in March, up from 117,000 in February. Unemployment edged up slightly to 4.2%. However, falling consumer confidence and weakening data are fuelling fears of a sharper slowdown. Trump’s sweeping tariffs are adding to the uncertainty, with some warning they could push the US into recession.

Euro area growth outlook weakens

The outlook for euro area growth has deteriorated amid a resurgence in global trade tensions. Rising uncertainty is expected to weigh on exports, investment and consumption.

In April, the region’s economy stagnated, with the services sector slipping back into contraction. Business confidence dropped to its lowest level since November 2022, weighed down by Trump’s latest tariff announcements. Germany, the bloc’s largest economy, saw activity decline after three months of expansion.

The European Central Bank (ECB) cut interest rates for the seventh time in a year, lowering them to 2.25% as growth slows and US tariffs begin to take effect. Borrowing costs are now at their lowest level since late 2022, with the post-pandemic inflation spike largely behind it. The ECB warned that US trade barriers could seriously damage the region’s economy, raising the likelihood of further rate cuts.

Euro area inflation eased for a second consecutive month, falling to 2.2% in March from 2.3% in February. However, the near-term outlook remains uncertain. Retail sales rose by just 0.3% in February, missing forecasts. One bright spot was industrial production, which grew by 1.1%.

China's economy faces headwinds

China’s economy grew by a stronger-than-expected 5.4% in the first quarter, supported by consumer subsidies and a surge in exports ahead of new US tariffs. However, momentum is expected to slow as the tariffs take effect.

Without further government support, China may struggle to meet its 5% growth target for the year. Exports, which accounted for a third of 2024’s growth, are likely to weaken, while the trade war may dent business and consumer confidence.

Deflation remains a concern and is expected to worsen, particularly as Chinese firms find it harder to sell abroad. Consumer prices fell 0.1% year-on-year in March, marking the second monthly decline in a row.

Despite this, exports jumped more than 12% in March compared with a year earlier, as companies rushed to ship goods before further tariffs. This export strength has helped keep factory activity high. However, the property sector continues to weigh on the economy, with real estate investment down 9.9% in the first quarter, following a 9.8% drop in the first two months of the year.