INSIGHT

We have discussed the impact on asset prices of the “Trump tango”, but we wanted to explore the US dollar more closely. The two words that have cropped up the most so far when analysing the economic impact of Donald Trump’s second term have been ‘uncertainty’ and ‘tariff’. Indeed, the two have often been used together. It is not difficult to see why.

Last Autumn, at her first budget, Rachel Reeves took a gamble. It has not paid off.

Last Autumn Isabel Schnabel, a member of the European Central Bank’s rate-setting executive committee, made a speech simply entitled “escaping stagnation”.

On Monday, Chinese company DeepSeek claimed that after investment of a mere $5.6m it was able to replicate the functionality of, what were deemed, the leading AI models. DeepSeek R1, its new “reasoning model”, was released on 20th January 2025 and has already become the top free app on the Apple Store (source: Apple Store), startling its rivals and stockmarkets.

Few things will matter more to the UK’s economic performance in 2025 as the course of inflation. And yet the outlook is unusually cloudy.

It is traditional for investment banks, brokers and research houses to put out their year ahead outlooks in December. In general, such documents mostly repeat the consensus and attempt to stand out with a few bold calls. It is equally traditional for many of these bold calls to have proved wrong by the end of January.

It was not too long ago that “political risk”, the notion that an election result or a political decision could seriously impact upon asset market returns was primarily the concern of investors in emerging markets.

Labour won a loveless but decisive majority in the UK general election in July promising to be “stable and boring”. Their budget was both and neither.

Spotlight tries to make a habit out of casting a closer look at China at least once every six to eight months. The reason for this is simple: China is too large to ignore.

Regular readers of Spotlight have probably become slightly bored of references to changes in monetary policy taking “a long and variable” time to impact upon the economy. Nonetheless, the point remains a crucial one.

Let’s start with the good news. British inflation in June, as measured by the consumer price index, grew at an annual pace of 2%. That follows the 2% outturn in May and represents the Bank of England (BOE) hitting its target for the first time in many years.

As a general rule of thumb, Spotlight tends to avoid making short-term calls. This time though it seems safe to make an exception.
The Conservative Party will lose the general election due in early July and Labour will form its first British government since 2010.