Market Update – 26th March 2025.

This morning, UK headline CPI reading slowed from 3.0% in January to 2.8% in February, while core CPI inflation, which excludes volatile items such as food and energy, slowed to 3.5% from 3.7%.  However, despite this cooling, we expect inflation to speed up again in the coming months due to rising energy prices and the soon-to-be increase to employer national insurance contributions and minimum wage as this is likely be passed on to consumers.

Unfortunately, these CPI figures were overshadowed by the Chancellor of the Exchequer, Rachel Reeves’ Spring Forecast just after midday.

Although Rachel Reeves kept her statement short, it wasn’t so sweet.  As we weren’t expecting any increases in taxes, our focus was on her statement around economic growth estimates and increased government borrowing, as she attempts to restore her fiscal headroom.

As expected (and as we alluded to in our Autumn Statement commentary) there was a gloomy picture for the UK economy in the near-term as the Office for Budget Responsibility (OBR) had to make a hefty downgrade to our country’s growth for this year from 2% to just 1%.

Although some of this downgrade can be attributed to the current global uncertainty caused by Donald Trump’s tariffs talk, the OBR’s previous forecast was far too optimistic given the tax increases that were announced and come into effect from 5 April 2025.  Surprisingly, the OBR upgraded their GDP growth forecasts for the years 2026 to 2029, to 1.9% in 2026; 1.8% in 2027; 1.7% in 2028; and 1.8% in 2029.

Reeves reaffirmed a commitment to increase defence spending to 2.5% of GDP, funded through cuts to international aid and restructuring within NHS England—potentially boosting the profitability of defence contractors and related industries. She also suggested that we could see higher disposable income by the end of the decade, which might help revive consumer spending and improve sentiment amid the UK’s prolonged high-interest-rate environment.

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Gilt markets took the statement positively, helped by the announcement that the Debt Management Office plans £299 billion of gilt sales in 2025/26, which is below the £302 billion estimated by the economists.  As such, the cost of government borrowing (gilt yields – which also impacts the cost of mortgages), eased 0.03% to 4.72%.

March’s eurozone PMI data was characterised by modest growth, with the composite reading edging up to 50.4 from February’s 50.2 (in relation to PMI, anything above 50 indicates an expansion and anything below a contraction). However, the underlying data painted a mixed picture of the region’s economic health. In a surprising turn, manufacturing—driven largely by Germany—expanded for the first time in two years, posting its strongest growth since May 2022. A surge in pre-tariff shipments to the U.S. played a role, but there were also promising signs of rising domestic demand, albeit limited to the goods sector. On the other hand, the services industry remained under pressure, struggling to gain traction and slipping from 50.6 in February to 50.4 in March.

Economists suggest that the business climate could improve in the coming months, fuelled by renewed optimism over major spending plans in infrastructure and defence, particularly in Germany. These investments are raising cautious hopes for a broader economic rebound across Europe.

Over in the U.S., business activity picked up in March, with the latest S&P Global survey revealed that input costs for businesses surged to their highest level in nearly two years, driven by rising expenses in both manufacturing and services. The same pick up could not be said for consumer sentiment, however. On Tuesday, The Conference Board reported that its consumer confidence index fell 7.2 points in March to 92.9 as concerns over import tariffs and government spending cuts somewhat subdued investor morale.

Still to come this week we have Tokyo inflation, UK retail sales, Eurozone consumer confidence and U.S. PCE data. Additionally, for more information on the Spring Forecast, please read commentary from our Investment Planning Director, Paul Morton.

Nicola Tune, Portfolio Specialist