An unexpected contraction in retail sales dampened UK growth expectations in January, while Eurozone GDP stagnated as political instability and rising unemployment hit France and Germany. In the US, President Donald Trump fulfilled his promise to withdraw from the Paris Agreement and his executive order encourages domestic energy exploration and the elimination of the electric vehicle mandate. Meanwhile, the EU looks to boost its global tech and clean energy position with a new strategic business initiative.
January commentary 2025
4 February 2025
Article last updated 4 February 2025.
Global equity and bond markets broadly delivered positive returns in January despite continuing economic and political uncertainty. The S&P 500 returned 2.78% over the month after optimism over deregulation and tax cuts was tempered by the launch of Chinese artificial intelligence (AI) company DeepSeek, triggering significant losses in the tech sector. The FTSE 100 closed January up 6.20%, mostly through foreign revenues and a sharp depreciation in the value of sterling. The Euro STOXX 50 gained 8.14%, though much of that could be attributed to Europe’s comparatively low weighting in the tech sector.
January market summary
In the US, GDP growth slowed in Q4 to 2.3% with businesses struggling to service rising demand for household appliances and vehicles ahead of the proposed increase in import tariffs. Consequently, US consumer spending increased at its fastest rate since Q1 2023. GDP growth registered 2.8% for the full year, ahead of expectations but a fraction down on 2023. Despite its positive outlook for domestic inflation, the Federal Reserve held its benchmark interest rate at 4.25%-4.5% citing uncertainty about the potential impact of tax cuts, tariffs and the planned deportation of undocumented immigrants which economists consider to be inflationary.
The UK recorded a 0.1% growth increase for Q4 after a pessimistic forecast from the central bank. Businesses were reluctant to invest against a backdrop of rising costs, weakness in the eurozone and the potential effects of punitive US trade tariffs. The recent rise in National Insurance contributions for employers also affected hiring and expansion plans. Business and consumer confidence fell sharply with the British Retail Consortium's sentiment monitor recording its lowest level since it began publishing data in March 2024. Hopes of a Christmas 'bounce' were dashed by an unexpected contraction in retail sales. While forecasts for future UK GDP growth were more circumspect through January, the IMF and OECD both raised their UK growth estimates for 2025, influenced primarily by the increase in public spending proposed in the Autumn budget.
Continuing political instability, rising unemployment and growth contraction in the region’s two largest economies contributed to unchanged Q4 GDP growth in the eurozone. Falling short of expectations, bloc performance was heavily affected by long-term contraction in the French and German economies which account for roughly half of eurozone GDP. France has lacked a stable government since their legislative elections last summer, while Germany faces a new round of elections after the collapse of its governing coalition in November. Eurozone labour market difficulties were reflected by a rise in unemployment to 6.3% – job security concerns also appeared to stall an anticipated increase in household spending. The ongoing risk of frosty trade relations with China and the US compounded an increasingly pessimistic outlook for the new year.
Washington hits back as Trump suspends Federal funding of landmark Inflation Reduction Act (IRA) programs
Under his executive order “Unleashing American Energy”, President Trump suspended funding for Biden-era Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act programs. Alongside fulfilling his promise to withdraw the US from the Paris Agreement for the second time, Trump’s executive order encouraged domestic energy exploration and eliminated the electric vehicle (EV) mandate, taking a significant step towards “terminating the Green New Deal”. All Federal agencies were given 90 days from 20 January to submit spending reviews to the National Economic Council and Office of Management and Budget (OMB), along with recommendations to enhance agency alignment with the conditions of the executive order.
Within a week, however, the order to suspend Federal financial assistance common to a raft of early executive orders (OMB memorandum M-25-13) was rescinded after government agencies complained that a universal funding freeze would threaten programs supporting schools, housing and healthcare provision for low-income Americans.
Should the suspension order be revised and reinstated, the president’s determination to unleash American energy may be contested in other quarters. Congress has already invested heavily in major sustainable infrastructure and climate projects involving American businesses and communities, and billions of dollars have gone into developing an EV industry facing a sharp cut in Federal assistance. Trump’s claims of a national “energy emergency” were also challenged by economists who argued that domestic oil and natural gas costs were falling, and that the president’s executive order meant appliances and vehicles would use more energy and fuel. Other critics of Trump’s Green New Deal U-turn highlighted the growing importance of renewable energy and EVs to the global economy (solar and wind-generated electricity outstripped coal in the US for the first time in 2024), convinced that the president’s “symbolic politics” would only temporarily slow the global direction of travel.
EU looks to boost global tech and clean energy position with new strategic business initiative
Amid pressure from Chinese markets, US threats of tariffs on EU exports, and President Donald Trump’s promise to strip back domestic corporate regulation, the EU acted to match its major global economic rivals with a coordinated rallying cry for innovation and growth.
In a draft paper dubbed the Competitiveness Compass, the European Commission’s strategic response aims to generate a bloc-wide “simplification shock”, reducing bureaucratic obstacles to business development and encouraging a more synchronised approach to industrial policies critical to digital and clean energy expansion. With support from member state economies, the initiative proposes to reduce administrative burdens and reporting obligations, develop a new bloc-wide legal status to help the establishment and growth of innovative companies, and complete the single market in key sectors to allow those companies to scale up. Throughout, the initiative’s principal focus is on revising existing industrial policies and regulations “needed to adapt to new realities”.
Amid pressure from Chinese markets, US threats of tariffs on EU exports, and President Donald Trump’s promise to strip back domestic corporate regulation, the EU acted to match its major global economic rivals with a coordinated rallying cry for innovation and growth.
The Commission’s paper nevertheless attracted criticism that the EU’s desire to compete more aggressively put deregulation before decarbonisation and pandered to growing political pressure from European conservatives to dilute or repeal major objectives of the region’s Green Deal. In response, the Commission highlighted the initiative’s secondary aim to establish a new Clean Industrial Deal, prioritising a competitive, decarbonised economy that will “stay the course” on the Green Deal’s regional goals. Supporting this is a proposal to establish a 90% emission reduction target for 2040 via the European Climate Law, an Industrial Decarbonisation Accelerator Act to speed up planning and permitting particulars for transitioning industries, and a commitment to reduce domestic and industrial energy costs by finalising the Commission’s energy union project.
