POLITICAL PUNCH AND JUDY ACTS MASK LONGER TERM ECONOMIC CHANGES

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Data Sourced from FE Analytics, and Bloomberg Finance LP

POLITICAL PUNCH AND JUDY ACTS MASK LONGER TERM ECONOMIC CHANGES

This week has been an eventful one with economic and political news being shaken up by public spats on both sides of the Atlantic. In the US, more import tariffs and concerns about the rising deficit were punctuated by a very public falling out between President Donald Trump and his largest financial backer, Elon Musk. UK domestic politics saw an even greater focus on defence spending, although the pledge by Keir Starmer to increase military spending to 3% of GDP had no timescale attached. There was a very public falling out at the top of Reform as its chairman quit.

The political Punch and Judy acts, however, they were sufficiently distracting to draw attention away from more signs that the US economy is feeling the chill of Trump’s erratic policy making. It also overshadowed news that European inflation fell below 2% and the most recent rate cut from the European Central Bank. As always, more high-profile short-term news can disguise the more important but less eye-catching long-term picture.

US: MIXED JOBS DATA WEAKENS DOLLAR AS TRUMP CALLS FOR RATE CUTS

The US jobs market showed some signs of cooling this week as the monthly ADP jobs reports showed US businesses added 37,000 new employees in May. This is the lowest monthly figure in two years and was lower than expected. Another report showed new job vacancies remain relatively high and grew slightly month-on-month, but there has been a general decline over the last six months. Some indicators show slight weakening in manufacturing and services output in the US and this has contributed to a decline in the value of the dollar. The US dollar index fell slightly to add to the decline seen in the last six months as some Wall Street banks forecast further weakness in the US dollar.

The cooling of the jobs market prompted President Donald Trump to call for interest rate cuts from the Federal Reserve. Meanwhile, the European Central Bank cut interest rates after CPI inflation in the Eurozone fell below 2% in May. The ECB cut of 0.25% was expected as it warned of the impact caused by US trade policy.

UK: DEFENCE SHARES CLIMB AS UK REVAMPS SPENDING AND STRATEGY

UK defence shares climbed as the government’s Strategic Defence Review identified additional spending of £68bn to modernise the military, thereby raising defence spending to 3% of GDP, from the current 2.3%. The Royal Navy gets the largest piece of the pie and shifts focus to defending the Atlantic with more submarines. Shares in defence contractors Babcock, Rolls Royce and BAE Systems have climbed 26.6%, 13.67% and 10.31% this month respectively. Babcock, which services the subs, has doubled in price in 2025 on soaring earnings. The RAF and the army are set to benefit from new AI- driven kit. Defence tech and cybersecurity provider QinetiQ has reversed recent losses and gained 37.48% in the last month, on the prospect of catering to the new battlefield.

The funding hike, may boost GDP by 1.4% and improve UK’s dismal productivity by 0.3% over 15 years, if it focuses on R&D and thereby attracts private investment, analysts say. The SDR will be followed by a new industrial strategy outlining plans to boost growth.

GLOBAL: OECD CUTS GROWTH OUTLOOKS AGAIN

The OECD cut its global growth forecast for a second time this year as it expects rising tariffs to slow GDP growth from 3.3% in 2024 to 2.9% this year. Trade barriers, tighter financial conditions, weakened consumer confidence, and high policy uncertainty are expected to affect the US, Canada, Mexico, and China the most; with US’s 2.8% annual growth grinding down to only 1.6%. Britain is expected to see a smaller downward adjustment, with its growth forecast cut to 1% from 1.2% as it grapples with slowing international trade, a precarious fiscal position and low investment. The OECD sees inflation rising to 3.2% this year before settling down to 2.3% in 2026; and warned that the Treasury may have to tax more to avoid breaching its self-imposed fiscal rules.

Global markets seemed unconcerned and gained, despite the US enforcing a doubled tariff rate of 50% on steel and aluminium and accusing China of breaching a tariff truce reached weeks earlier, as well as predictions that Trump’s tax plans will add $2.4tn to the US deficit.

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