Tariffs, UK GDP and Mrs Lincoln | Weekly Market Update

I have in my head three basics scenarios for the Trump tariff saga:

1. Trump doubles down, doesn’t get the deals he wants and tariffs end up close to today’s proposed levels (bad)
2. Trump backs off, there is a lot of talk of victory but we end up with limited, targeted tariffs (good)
3. There are deals to be done and we end up somewhere in between

On Wednesday this week I feel the market moved from scenario 1 as its base case to something closer to scenario 3. The US market rose 10% intra-day as the bears betting on undiluted tariffs were forced to cover their shorts. Some of that short-covering heat came out of the market yesterday but I would still have US markets around 7% off their lows as I type. A more messy deal focussed environment is obviously better than Trump’s initial proposals. My only concern is that this happens quickly. Companies are currently, understandably, delaying investment and hiring decisions and these delays are bad for business and the economy.

I was therefore somewhat comforted to see some strong (backwards looking) UK GDP numbers this morning. 2% growth used to be the norm for the UK but now it would be genuinely good news. Part of the problem here has been low UK productivity growth and I was intrigued to see some research on this from the Resolution Foundation this week. One driver looks to be that the extra people hired into the NHS over recent years have not produced measurable gains in healthcare output so far (so productivity in healthcare looks like it is falling):

 

 

This makes me question the productivity data a little. Shorter hospital waiting lists and (I’d hope) more people available to look after you should mean an improvement in healthcare quality (if not outcome). If our productivity (and GDP) statistics are failing to measure this accurately it may be that the UK underlying story is a bit better than the data suggests. If the healthcare hiring surge is over then the drag this puts on our productivity data might start to fall away too.

One other silver lining of the tariff mess is what has been happening in energy markets. Having been around £65 a barrel for much of 2022, Brent crude oil is now below £50. If this sticks (and futures markets suggest it should do for the next couple of years at least) then this will help consumers and provide a cushion of sorts for a tariff hit economy.

 

Low energy prices will also help with the inflation picture. I was therefore also comforted by better than expected US inflation data this week (again, of course, backwards looking and pre-tariffs). Amidst all the tariff headlines there is an element of “other than that, Mrs. Lincoln, how was the play?” to non-tariff related news. But it is worth reminding yourself that the global economy looks to have been in pretty decent shape heading into this crisis. And the faster it is resolved, the more likely it is that some of this decent economic momentum can be salvaged. Please, Donald, get on with it.

 

Chris Brown, CIO

cbrown@ipscap.com

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