Closing summary: Tariffs and weak retail sales cast a shadow
US retail sales slumped and steep tariffs from the White House may be in the works. Perhaps things might not go so well for the global economy in the next few months?
James Knightley, chief international economist at ING, an investment bank, said it was a “subdued start to 2025 in the US economy. Blame it on the weatherman? Certainly fires in Los Angeles and cold weather elsewhere may have affected consumer spending. But maybe there’s something else, he asked:
Could tariff worries also have played a role?
In trying to rationalise this outcome, we know that consumer confidence did fall quite a lot in January, largely on a sense that prices were going to rise on tariffs (big rise in price expectations and the responses showing it was going to be a worse buying environment for big ticket items – which are often imported).
We will need to wait until the February data to see if this is the start of a more cautious consumer trend or indeed whether it was simply a weather-related pull back and we get a subsequent big gain.
Modupe Adegbembo, an economist at Jefferies, a US investment bank, said
Our view remains that tariffs are a negotiating tool and while some tariffs will be imposed, the eventual impact will not be as bad as feared. To put some numbers, a 20% tariff on Europe could potentially reduce European GDP by as much as 0.5%. We think that the eventual impact would be smaller, of the order of 0.1% — 0.2%.
For the UK, it is the mention of tariffs including VAT retaliation that has sent shivers down spines. The UK is a relatively low-tariff nation, but it has higher VAT (on all sales, both from home and abroad) than many other nations, so could be in line for a bigger hit of up to 24% if the US adminstration takes the headline rate.
Paul Dales, chief UK economist at Capital Economics, said:
We can’t stress enough how much uncertainty there is about the tariffs and what they would mean for the UK economy.
[However,] we’ve learnt from Trump’s first four weeks in office that things can change very quickly and often threats don’t turn into action. It’s very possible that the proposed tariffs will be moderated or cancelled. As a result, at this stage we aren’t minded to alter our existing assumption that the UK will face a lower US tariff of 10% on all goods from Q2 this year.
In other business headlines from today:
Thames Water is to appeal to the UK’s competition regulator to be allowed to raise customers’ bills over the next five years even higher than previously granted, prompting a furious reaction from campaigners.
NatWest wants to increase its chief executive’s maximum pay by more than 40%.
Baby formula should be placed in standardised packaging in hospitals and parents allowed to use gift vouchers and loyalty card points to buy formula milk, the UK competition watchdog has proposed.
Pressure is growing on the Royal Society to expel Elon Musk from its fellowship after more than a thousand scientists signed an open letter expressing dismay at its lack of action on the matter.
The owners of the multibillion-pound James Bond franchise are embroiled in a fight to keep control of the super spy’s name, after a Dubai-based property developer filed claims in the UK and Europe that they are not using the trademark across a range of goods and services.
You can continue to follow our live coverage from around the world:
No 10 says Starmer and Trump spoke last night as minister calls for ‘clear thinking’ on tariff threat
European leaders scared of voters and failing to defend democracy, Vance tells security summit
In US politics, the Trump administration sparks outcry as it continues to gut federal workforce
In our coverage of the Middle East crisis, Hamas announces further details of Israelis it will free this weekend
Thank you for following today. Please do join us again, bright and early, on Monday for more of the same. JJ
As expected, it has been a relatively benign opening on Wall Street.
Here are the opening snaps, via Reuters:
S&P 500 UP 3.35 POINTS, OR 0.05%, AT 6,118.42
NASDAQ UP 9.95 POINTS, OR 0.05%, AT 19,955.59
DOW JONES DOWN 1.47 POINTS, OR 0.00%, AT 44,709.96
US industrial production figures are just out as well: industrial output rose by 0.5% in January, above the 0.3% expected by economists.
December’s reading was also revised up from 0.9% to 1%, according to the Federal Reserve.
The US retail sales number could maybe give a narrative of a weakening economy. Perhaps the industrial strategy could offer a corrective on the other side?
US futures are in any case indicating that that the main indices will be flat when markets open in a few minutes, with the S&P 500 due to fall by less than 0.1%.
The drop in US retail sales has helped other currencies against the dollar.
The pound rose to its highest since 20 December, at $1.2609 against the US dollar – a gain of 0.3% for the day.
The euro is up 0.3% as well, at $1.0494.
US Treasury yields slipped after the data, which might push the Federal Reserve slightly towards a looser monetary policy stance. Reuters reported:
The benchmark US 10-year yield slid 4.1 basis points to 4.484%, while the two-year yield, which reflects interest rate expectations, dipped 3.7 bps to 4.274%.
It was the biggest drop in US retail sales since March 2023 – and a surprise for investors.
Kathy Jones, chief fixed income strategist at Charles Schwab, a wealth manager, said:
Retail sales took a surprising drop in January. Dec was revised up from a gain of 0.4% to 0.7%, but the steepness of the drop is a surprise.
Bad weather is blamed for the drop in retail sales. There were fires and snow storms. Biggest decline was in autos.
“Oof!” said Gregory Daco, chief economist at EY, an accountancy firm, pointing to a “post-holiday slump in January”. His chart below shows that sports and hobbies spending was the worst performer.
US retail sales slumped as Donald Trump took office
US retail sales slumped much more than expected in January as Donald Trump took office as president.
Sales fell by 0.9%, according to the US Census Bureau, far below the 0.1% decline expected by economists polled by Reuters.
Weaker US consumer spending, if it continues, could prompt the Federal Reserve to restart its path of cutting interest rates, after indicating last month that it was pausing cuts.
The US dollar index slipped further in the immediate aftermath of the figures, down by 0.5% during the day after earlier dropping by 0.2%.
Chinese fast fashion company Shein may delay a London stock market listing until it knows the impact of Donald Trump’s tariffs on small goods imports, according to the Financial Times.
Shein’s plans to list in London have been greeted with a mixture of satisfaction from those eager for more big business in the UK, and concern in others, because of questions over whether its supply chain contains cotton from Xinjiang that prompted it to abandon a US listing. Xinjiang cotton has faced persistent questions over possible use of forced labour from the Uyghur people.
The FT reported:
Shein, which sells garments directly from thousands of Chinese factories at ultra-low prices across the world, had previously told investors during roadshows that a London listing could happen as soon as this Easter, according to people with knowledge of the discussions.
But an initial public offering is now likely to be pushed into the second half of this year following Trump’s move to close the so-called de minimis rules, according to three people familiar with the process.
Sterling rises to highest in 2025 as dollar weakens
The pound has hit its highest level of the year thanks to the dollar weakness that greeted Donald Trump’s delayed tariff plan.
Sterling rose 0.1% to $1.2595 against the US dollar, the highest since new year’s eve eve on 30 December. The US dollar index, measured against a trade-weighted basket of currencies, fell by 0.3%.
It’s fair to wonder why the announcement of sweeping tariffs by the world’s biggest economy would weaken its currency. It seems that, while Trump’s tariff threats are dominating market movements, any temporary relief is welcomed by investors.
Trump has already shown that everything is up for negotiation. He previously imposed then swiftly postponed tariffs on Canada and Mexico in return for relatively superficial concessions.
Jim Reid, an analyst at Deutsche Bank, said:
Such a country-by-country process should inevitably take some time and Commerce Secretary nominee Lutnick said that investigations would complete by April 1 and remedies could be implemented immediately after. In the meantime, questions whether this tariff threat will be used as a negotiating tool are likely to linger. Separately, Trump said that tariffs on cars above the reciprocal tariffs would also be coming soon. Still, the combination of limited tariff news and lower yields led to the broad dollar index (-0.83%) falling to its lowest since mid-December.
Maxime Darmet, senior economist at Allianz Trade, said that the UK tariff hit could be lower if potential US reciprocal tariffs and VAT duties are applied on the basis of the UK’s effective VAT rate.
That is because below the headline rate of 20% there are lots of exemptions on items such as essential foods, children’s clothing, plus some lower rates.
However, even lower tariff rates of 10% to 12% could knock at least 0.5 percentage points off UK economic growth. Given that UK GDP grew by 0.9% in 2024, that is a hit that the growth-focused Labour government can ill afford.
Darmet said:
The reciprocal tariff announced by the US administration could set the stage for a steep increase in tariffs, including on the UK. The criteria used to assess those tariffs could include the average tariff rate other countries charge on US exports, and the VAT that is applied to US exports. But it could include other non-tariff barriers, such as regulatory requirements, subsidies, and exchange rate policies.
In a scenario where the US matches UK tariffs on US imports and the VAT differential, the US trade-weighted tariffs on UK imports could rise from the current 1% to around 10-12%. However, this rate could be higher, for example if the US added non-tariff barriers and/or applied the 20% UK standard VAT rate, rather than the 14.3% UK effective VAT rate, which is lower due to reduced rates and exemptions on some goods.
UK could be hit by 24% tariffs if Trump adds VAT retaliation on top
The UK could be hit by import tariffs of as much as 24% if the Trump administration adds VAT rates on top of tariffs, according to Capital Economics, a consultancy.
The White House said that it would look at how countries impose “unfair, discriminatory, or extraterritorial taxes imposed by our trading partners on United States businesses, workers, and consumers, including a value-added tax”.
That has raised the prospect of the US imposing tariffs to match VAT levels, as well as reciprocating average tariffs levels. If the US were to go down that route, then India, Brazil, the EU and the UK would be the hardest hit, Capital Economics said.
That is because the UK has a relatively high VAT rate of 20%, while US sales taxes are relatively low.
Paul Ashworth, chief North America economist at Capital Economics, said:
Most people would consider VAT to be a non-discriminatory tax, since it is also applied to domestically-produced goods making a level playing field. But [the president’s] adviser Peter Navarro has been pushing the line since Trump’s first term that, since the US only applies a much lower average sales tax at the state level, this is a form of discriminatory tariff.
So if the US imposes reciprocal tariffs that add VAT rates and MFN tariff rates together then, in order of severity, India (29%) and Brazil (28%) would be hit hardest, followed by the EU (25%), UK (24%), Mexico (23%) and Canada (19%).
The “winners” would be Singapore (9%), Taiwan (12%) and Korea (13%). The average effective tariff rate on all US imports would rise from less than 3% now to around ~20%. That would add roughly 2% to US consumer prices, meaning that inflation would temporarily rebound to 4% later this year.
NatWest wants to raise bank boss’s maximum pay by more than 40%
NatWest wants to increase its chief executive’s maximum pay by more than 40%, as the banking group prepares to return to full private ownership 17 years after it was bailed out by taxpayers during the 2008 financial crisis.
The high street lender, previously known as Royal Bank of Scotland, paid its chief executive, Paul Thwaite, £4.9m in his first full year in the role in 2024, shy of his maximum potential payout of £5.4m.
The board of NatWest is now proposing raising his maximum pay by 43%, giving him the chance to earn up to £7.7m for a single year’s performance. A model produced in the annual report shows that his pay package could soar to £9.5m if there was a 50% increase in NatWest’s share price – given much of the payout is linked to long-term bonuses made up of the bank’s own stock.
It comes as NatWest announced a 24% rise in its banker bonus pool, which will be shared by its top-performing staff, to £446.6m. That is the biggest bonus pool shared by NatWest bankers since 2013.
You can read the full story here:
Trump tariffs: India, Brazil and EU may be in crosshairs
The Trump adminstration has not made it clear how it intends to levy reciprocal tariffs, but there are some big clues as to who will be targeted.
A White House “fact sheet” published on Thursday named Brazil, India and the EU were singled out among “endless examples where our trading partners do not give the United States reciprocal treatment”.
Gareth Leather, senior Asia economist at Capital Economics, also highlighted India as a country at risk. He said:
We don’t yet know the formula that will be used to calculate reciprocal tariffs. But based on a simple calculation that sums VAT rates and the difference in tariff rates, India emerges as the country within Asia that would be hit hardest by a new tariff regime, followed by Pakistan, Thailand and Vietnam.
For Europe, it all depends on the details, according to strategists led by Peter Schaffrik at Royal Bank of Canada. They wrote:
The type of tariff ultimately levied by the Trump administration matters a great deal for Europe’s economies. ‘Reciprocal’ tariffs, in the literal sense, are unlikely to hurt the EU or the UK. Targeted tariffs can be very damaging to individual sectors. High universal tariffs clearly hurt the most but are also the least likely to be implemented.
Alarmingly for Germany in particular, the White House also noted the disparity in tariffs on cars. It did not mention those going the other way on commercial vehicles, known as the “chicken tax”. (Yes, you read that right.) The White House said:
The EU also imposes a 10% tariff on imported cars. Yet the US only imposes a 2.5% tariff.
Updated
Eurozone economy narrowly avoided stagnation at end of year
The eurozone economy grew faster than expected in the last quarter of 2024, narrowly avoiding stagnation, according to updated data published on Friday.
Economists had expected 0% growth for the fourth quarter, but instead output rose by 0.1%, according to Eurostat, the EU’s statistics office.
The data confirmed the picture of the EU split between the struggling large, northern economies and the faster-growing southern countries – an inversion of a decade of struggles in the south.
The German and French economies shrank by 0.2% and 0.1% respectively in the quarter, while Spain’s grew by 0.8% – gaining 3.5% over the course of 2024.
Growth slowed as the boost from increased spending during the Olympics in Paris faded, according to Melanie Debono, senior Europe economist at Pantheon Macroeconomics, a consultancy. She said other survey data points to only a small rebound in the first quarter.
Feargal Sharkey is the former leader of rock band the Undertones. But his love of nature – and disgust about sewage in rivers – has made him perhaps the most prominent of the campaigners for clean water.
He said that “Thames Water shows two fingers to customers” by appealing for higher bills for households and businesses.
Sharkey wrote on social network X:
Having spent decades ram raiding customers bank accounts for billions £, loaded the company with £19bn in debt, demanding another £3bn in debt, dumped billions of litres of sewage into rivers, over abstracted chalk streams they’re now demanding and appealed to the CMA that they should be allowed to increase bills by 53%
We’ve been had!!!
Customers will be “incensed” that Thames Water has asked to raise bills further, according to the official advocate for water consumers’ rights.
Mike Keil, chief executive of the Consumer Council for Water (CCW), said:
Customers of Thames Water are already facing steep bill rises and they will be incensed the company now has the temerity to pursue an even larger increase. This is a company which has a poor track record on service delivery and customer complaints, so people will rightly question why it should be trusted with even more of bill-payers’ money.
People want investment to improve services but they also expect value for money and to be treated fairly. CCW will do everything in its power to ensure the views and concerns of customers are heard loudly and clearly during this appeal.
Under the unusual privatised water system in England and Wales, the government assigns an official representative of consumers (who are unable to simply switch to another provider because water services are a natural monopoly).
That has meant the CCW has had a lot of work in recent years, as outrage over leaks and sewage overflows has become a pungent political issue.
It has been a brutal morning for British engineering company John Wood Group. Shares in the FTSE 250 company are down more than 30% to a record low.
Wood, which provides consultancy services to oil and other energy businesses, said it expects negative free cash flow of between $150m to $200m for 2025, after previously guiding that it would generate “significant” cash. Investors were clearly not impressed.
You can see the resulting share price plunge on this chart: the right-hand side is Friday.
Wood said it had cancelled executive and employee bonuses in response to “weaker-than-expected trading in the fourth quarter”.
And it appears that more cost cuts will be on the way, after previous actions failed to improve it. Of the future cost cuts, it said: “Following these actions, the business will be on a firmer operational footing, but cash generation has yet to materialise and financial strength needs significant improvement.”
Updated
Campaigners for the public ownership of England and Wales’s water companies have said Thames Water’s appeal to raise bills further is “a joke at our expense”.
The company has argued that raising bills is the only way for it to recover sustainably, and to be able to invest enough to prevent the controversial discharge of sewage into Britain’s rivers and seas.
However, Cat Hobbs, director of campaign group We Own It, said:
This appeal is a blatantly greedy and desperate bid from Thames Water to rake in even more cash from the public as it drowns in its own debt. This company is a joke, but the joke is at our expense.
The government must immediately bring Thames Water into special administration and permanent public ownership. That is the only way it will work for households and the environment.
Blair’s government stood up for the public interest when Railtrack went bust; it’s time for this Labour government to wake up and do the same.
Baby formula 'could be put into unbranded packaging in UK hospitals' - regulator
Baby formula could be placed in standardised packaging in hospitals, the UK competition watchdog has suggested, while parents should be allowed to use gift vouchers and loyalty card points to buy formula milk, as part of efforts to combat soaring prices and lack of choice in the market.
Labelling of infant formula in hospitals or other healthcare locations should be standardised, the Competition and Markets Authority (CMA) suggested, with formula put into non-branded containers to tackle the power of marketing, or the NHS could offer its own variety.
The CMA proposed five measures on Friday, which it says will improve outcomes for parents and could allow them to save £300 a year by switching to a lower-priced brand, after a year-long study into the infant formula market.
European stock markets have mostly dropped on Friday morning after Donald Trump signalled his intention to raise tariffs. However, the moves are not anywhere near as dramatic as previous bouts of Trump tariff turbulence.
London’s FTSE 100 is down by 0.3%. Here are some more of the moves in benchmark indices from across Europe:
Germany’s Dax is down 0.3%
France’s Cac 40 has edged up by 0.1%
Italy’s FTSE MIB is down 0.1%
Spain’s Ibex has fallen 0.3%
The Stoxx 600 index is down 0.2%
Lib Dem MP calls for rejection of Thames Water bills increase
Liberal Democrat MP Charlie Maynard has said that Thames Water should not be allowed to raise bills further because a 35% increase over five years is “more than enough”.
The MP was granted permission to intervene in the hearing over Thames Water’s debt package to represent household interests. His barrister argued in court that the company should be put into special administration, essentially temporary nationalisation, to end a “Thames Water debt doom loop”.
Maynard said:
A 35% increase is already far more than enough. So much of the money is being spent on sky high interest rates and advisory fees. Everyone’s focus now should be putting the company into special administration so its balance sheet can be reset and our bills spent on actually fixing the sewage network.
The company may gain less than £500m in usable cash from the first £1.5bn of the £3bn in emergency debt because of expensive fees and interest costs, Maynard argued.
You can read more about the fees and interest costs here:
Trump reciprocal tariffs would hurt UK economy - business group
Donald Trump’s proposal to impose reciprocal tariffs on every country in the world will hurt the UK economy if the US follows through on the threat, according to the British Chambers of Commerce (BCC).
The US president said on Thursday that he would raise tariffs to match those on American exports, although he did not reveal any specific new measures, and delayed the implementation until the White House can develop a full plan.
The BCC, a business group, called for the UK to refrain from imposing retaliatory tariffs on the US to avoid being dragged into a trade war.
William Bain, the BCC’s head of trade policy, said:
These new proposals for reciprocal and differential tariffs will create more cost and uncertainty for investors, businesses and consumers across the world. Plans to factor in countries’ VAT regimes could lead to especially complex and costly tariff scenarios which upend established trade norms.
It is vital that the UK government does not get sucked into a trade war of tit-for-tat tariffs, which could easily spiral out of control. It will need to adopt a flexible and agile response, while assessing the reaction of other major players. But it must make the most of the time available before the introduction of these tariffs to negotiate with the US on alternative arrangements.
If they do not, then sectors such automotives, pharmaceuticals, and food and drink could be significantly hit as higher tariffs inevitably feed through into globally higher prices for consumers.
Thames Water: 'customer bills for next year unaffected'
Thames Water has said customer bills for 2025-26 would be unaffected by its appeal to the Competition and Markets Authority.
Neither will there be any delay to its spending plans for the next year, it claimed.
However, it said that it wants three things from the CMA:
A regulatory settlement that reflects the circumstances of Thames Water’s operating area
Targets that are challenging but achievable
An appropriate balance of risk and return
England is the only country in the world where the water industry is entirely privatised. Thames Water is the biggest of those private companies.
It serves just under a quarter of the UK population across London and the Thames Valley.
Thames Water said that it had asked regulator Ofwat for a bills increase that “recognises its current position and supports its turnaround”. It does not believe that it got it.
Ofwat in December set the level of bills increases allowed over five years from April. That followed a tortuous process of negotiation between each water company in England and Wales. The regulator submitted draft proposals, the companies responded, and then the regulator gave a “final determination” of how far bills could rise.
Thames Water on Friday said:
While there has been progress, after a thorough review, it is clear that there remain significant gaps between the final determination and what it needs to deliver for customers and the environment.
You can see the bills increases allowed by Ofwat for each separate water company in this chart. Southern Water customers will have to lump the biggest increases.
Thames Water to ask for bills increase of more than 35% over five years
Good morning, and welcome to our live coverage of business, economics and financial markets.
Thames Water has said it will appeal to the UK’s competition regulator to ask to raise bills even higher than previously granted, a in a move likely to prove controversial with politicians and campaigners.
The water company, which serves 16m customers in London and southeast England, said its board had made a unanimous decision to appeal to the Competition and Markets Authority (CMA).
Water bills in England and Wales will rise by 36% on average over the next five years. England and Wales water regulator Ofwat allowed Thames to raise them by 35%. However, the company had asked for a 59% increase.
Thames Water is on the verge of financial collapse. It is awaiting a court judgment on a £3bn debt deal that will allow existing creditors to add to its debt pile of about £19bn. The judgment could come as soon as today, although it is expected early next week.
The company has said that without the cash it will collapse on 24 March.
In a statement to markets on Friday morning, it said the board had concluded that “the final determination for the regulatory period 2025 to 2030 does not appropriately support the investment and improvement that is required for Thames Water to deliver for its customers, communities and the environment for the next five years.”
The company is also being investigated by the water regulator for England and Wales, Ofwat, after delaying environmental improvement schemes.
The chairman of Thames Water, Adrian Montague said:
We have taken the decision to refer our final determination to the Competition and Markets Authority in the interests of our customers and the environment. We are focused on putting the business on a long-term stable footing so we can succeed in our turnaround, and build and maintain an infrastructure that supports growth and can withstand the effects of climate change.
We put forward a realistic business plan for 2025-2030 that addressed our customers’ and stakeholders’ priorities such as providing safe and resilient water supplies and improving performance. After careful consideration, our analysis shows that our final determination for the next regulatory period will continue to impact our ability to fund the improvements our customers and the environment so rightly want and deserve.
The agenda
10am GMT: Eurozone GDP growth second estimate (fourth quarter; previous: 0.2%; consensus: 0.1%)
1:30pm GMT: US retail sales growth (January; prev.: 0.4% month-on-month; cons.: -0.1%)
