The UK also gets a hat-tip from the IMF for the trade deals announced in the last few weeks. The Fund says: Policy stability is critical to support business confidence in an increasingly uncertainty global environment. In this context, recent efforts to strike trade agreements with key partners, including the EU, India, and the US, demonstrate the authorities’ commitment to finding common ground and establishing a more predictable environment for UK exporters. On monetary policy, the IMF recommends that the Bank of England continues to ease interest rates “gradually”, while remaining flexible due to elevated levels of uncertainty. The Fund says: The pickup in inflation that began in 2024 is expected to last through the second half of this year, with a return to target later in 2026 as underlying inflationary pressures continue to recede. Although monetary policy calibration has become more difficult due to still-weak growth, the temporary rise in inflation and high long-term interest rates, staff sees the BoE’s gradual pace of easing as appropriate. Given the elevated uncertainty, the MPC is encouraged to retain flexibility to adjust the monetary stance in either direction if needed. The IMF also applauds Rachel Reeves’s recent changes to the fiscal rules, saying they “enhance its credibility and effectiveness”. But… the Fund also suggests the chancellor could “promote further policy stability” by having only one Office for Budget Responsibility assessment of her self-imposed fiscal rules each year, at the time of the Budget, rather than the current twice-yearly review. The Financial Times reports that this idea is under discussion in the Treasury, “according to several well-placed officials”. In what looks like a significant intervention, the International Monetary Fund is recomending that Rachel Reeves loosens her fiscal rules to prevent the need for emergency spending cuts. Adding to the clamour from backbench Labour MPs incensed by the government’s welfare cuts, the Washington-based organisation said the chancellor should examine ways to avoid making short-term savings when there is a downturn in economic forecasts, my colleague Phillip Inman reports. An easing of to the fiscal rules would potentially give the chancellor more breathing space on potential spending cuts. The IMF said the current system inherited from the previous Conservative government of twice-yearly assessments of the public finances by the Office for Budget Responsibility (OBR) was ripe for an overhaul. It said: “There is still significant pressure for frequent fiscal policy changes, given that small revisions to the economic outlook can erode the headroom within the rules, which is the subject of intense market and media scrutiny.” The IMF said Reeves could downgrade the significance of spring OBR report, give a broader outlook for the public finances – “de-emphasising” the single cash figure for spending headroom – or “establish a formal process so that small rule breaches do not trigger corrective fiscal action outside of the single fiscal event”. More here. The Chancellor of the Exchequer, Rachel Reeves, has responded to the IMF’s upgraded growth forecast for 2025, saying: “The UK was the fastest growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast. We’re getting results for working people through our Plan for Change – with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the National Living Wage, and wages beating inflation by £1,000 over the past year.” Newsflash: The International Monetary Fund has lifted its forecast for UK economic growth this year. Following an annual check-up on the British economy, the IMF has upgraded the UK’s expected growth rate this year to 1.2% from 1.1%, and reassured us that an “economic recovery is under way”. This reverse some of the IMF’s downgrade last month, when it cut the UK’s predicted growth this year from 1.6% to 1.1%. It follows the UK economy’s decent start to 2025, with growth of 0.7% recorded in the January-March quarter. Luc Eyraud, the IMF’s mission chief to the United Kingdom, told reporters in London this morning: “These revisions reflect the strong GDP performance in the first quarter, reflecting the resilience of the UK economy despite the complex external environment.” However, looking ahead, the IMF also warns that trade tensions linked to US tariff plans will reduce UK economic growth next year. It expects global trade tensions will wipe 0.3 percentage points off growth for the year, but is still predicting growth will increase to 1.4% in 2026. Trade tensions will weigh on growth through “persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK”, the IMF warns. Ouch. Confidence among British retailers has fallen at the sharpest pace in five years. The latest healthcheck on UK retailing from the CBI shows that a decline in sales volumes gathered pace this month, and that stores expect conditions to worsen. The CBI’s quarterly gauge of business sentiment has dropped at its fastest rate since May 2020 this month. A net balance of -29% of firms expect their business situation to worsen over the coming three months, compared with -19% in February. The CBI’s monthly gauge of how retail sales compared with a year earlier fell to -27 this month - the lowest since March - from -8 in April, which had been its highest since October. A measure of expected sales for June fell to -37, the lowest since February 2024. Ben Jones, lead economist at the CBI, says: “This was a fairly downbeat survey and highlights some of the challenges facing the retail and wider distribution sector. In contrast to other recent retail data, this survey suggests parts of the sector are still struggling with fragile consumer demand, though online sales seem to be holding up better.” However, the official retail sales figures from the Office for National Statistics have been more optimistic laterly – they’ve shown a rise in sales volumes in recent months, helped by sunny weather. Economic sentiment across Europe has risen this month, the latest data from the European Commission shows. The EC’s economic sentiment indicator (ESI) has improved in both the EU (+0.6 points to 95.2) and the euro area (+1.0 points to 94.8). That’s an encouraging pick-up, following two months of declines, but both gauges are still below their long-term average. The EC reports that: The rise in the ESI for the EU was primarily driven by a partial rebound of confidence in the retail trade sector and among consumers, with a moderate contribution also from the construction sector. Confidence in both the industry and services sectors remained broadly stable. Among the largest EU economies, the ESI increased in Italy (+2.8) and in Germany (+1.5), but fell in France (-3.5), the Netherlands (-0.8), Poland (-0.6), and Spain (-0.4). Relief that trade tensions between the US and Europe have abated is pushing down the gold price. Gold has fallen by 1.3% to $3,297 per ounce, away from the record highs touched earlier this year. Relief that Donald Trump has delayed new higher tariffs on EU imports has pushed Germany’s DAX share index up to a new record high! The DAX has touched a new peak of 24,161 points this morning, up around 0.5%. It’s now up around 21% so far this year, outpacing other markets. Boom! Britain’s FTSE 100 share index has hit its highest level since early March. The UK’s blue-chip share index has risen over the 8,800 point mark for the first time in two and a half months, up 86 points or almost 1%. Ouch! Germany’s economy is on track for its worst performance in post-war history, a new report shows. The German Chamber of Commerce and Industry (DIHK) predicted this morning that Europe’s largest economy will contract by 0.3% this year, Reuters reports. That would be the third annual contraction in a row, although not as bad as the 0.5% fall in GDP which the DIHK predicted back in February. The DIHK also warned that the risk of recession persists, even though growth in the first quarter of the year was boosted by a scramble to pre-empt the US trade war. The DIHK forecasts German exports will decline by 2.5% in 2025, with 29% of companies surveyed expecting exports to fall over the next 12 months, while only 19% expect a rise. The London stock market is being pushed higher by “positive trade vibes”, reports Susannah Streeter, head of money and markets at Hargreaves Lansdown: “A mood of cautious relief is spreading after the long weekend, amid hopes for more fruitful trade negotiations between the United States and its global partners. There are no post bank holiday blues for the London market, with the Footsie in striking distance of the record high reached in February. More positive vibes are pulsing about the outlook for the global economy, with hopes that more scores can be etched on the doors of trade talks. “US futures point to a higher open on indices, as optimism spreads after the holiday break. Trump once again has pressed the pause button, this time on proposed 50% tariffs on imports from the European Union, which caused nervousness at the end of last week. But while the FTSE 100 is still up almost 1%, European markets – which rallied yesterday – are more subdued. Germany’s DAX has gained another 0.3%, while France’s CAC is 0.15% higher. The UK government is pledging to create tens of thousands of apprenticeships and training opportunities, as part of its push to increase workers’ skills and cut net migration. Ministers have promised a total of 120,000 new training opportunities for construction workers, engineers, healthcare staff and other trades in England before the next general election. Up to 45,000 training places will be funded by hiking the charge paid by employers for bringing in foreign workers by a third. Announcing the push, education secretary Bridget Phillipson said: “A skilled workforce is the key to steering the economy forward, and today we’re backing the next generation by giving young people more opportunities to learn a trade, earn a wage and achieve and thrive. When we invest in skills for young people, we invest in a shared, stronger economic future - creating opportunities as part of our plan for change. But everyone has a role to play in a thriving economy, and we’re taking our responsibility seriously providing more routes into employment, it’s now the responsibility of young people to take them.” European bond prices are rising this morning, pulling down government borrowing costs. The yield, or interest rate, on German 10-year bonds has dropped by four basis points (0.04 percentage points) to 2.519%. UK 10-year gilts are down almost 8 basis points, at 4.6%, while shorter-dated two-year gilt yields are down four basis points at 3.96%, the lowest in over two weeks. This follows a recovery in US Treasury prices this morning. Over the last couple of weeks, bond yields had been rising as prices fell amid a global debt sell-off. The Financial Times is reporting this morning that the UK government is shifting to shorter-term borrowing to lower its interest bill, and to lift some of the pressure on its tax and spending plans. Jessica Pulay, head of the UK’s Debt Management Office, told the FT that the DMO is softening Britain’s reliance on long-term borrowing. Short-term borrowing is typically cheaper than issuing longer-term debt, but it also means a country has to return to the markets more often. Stocks have jumped in London as trading resumes after the Bank Holiday weekend. City investors are relieved that Donald Trump has delayed his threatened hike on EU tariffs to 50% until July, cooling trade war fears. The FTSE 100 index of blue-chip shares is up 75 points, or 0.85%, to 8792 points, close to a two-month high. Engineering group Melrose (+3.8%) are the top FTSE 100 riser, followed by technology firm DCC (+2.4%) and Rolls-Royce (+2%). Food inflation in the UK has risen for the fourth month in a row, figures show, driven by increases in the cost of fresh produce, including steak. The annual rate of food price rises hit 2.8% this month, after a 2.6% rise in April, according to the latest shop price data from the British Retail Consortium (BRC). However, prices overall remained in deflation – 0.1% cheaper than a year ago and unchanged from last month – with the cost of non-food goods falling, particularly for electricals as retailers cut prices to drum up business before a potential hit from Donald Trump’s tariffs. Last night the EU’s trade commissioner Maros Šefčovič signalled that the bloc was “fully committed” to reaching a trade agreement with the United States. Šefčovič posted on X last night that he had had “good calls” with US commerce secretary Howard Lutnick and US trade representative Jamieson Greer, and that the European commission “remains fully committed to constructive and focused efforts at pace” towards an EU-US deal. More car news: Japanese manufacturer Toyota is moving some production of its GR Corolla sports car to Britain. According to Reuters, Toyota will spend around $56m on a dedicated production line at its Burnaston plant in Derbyshire, to produce 10,000 cars annually for export to North America from the middle of 2026. Reuters reports: By shifting some production from Japan, Toyota aims to use excess capacity in Britain to help it cut delivery wait times for the car, said the people, who spoke on condition of anonymity. The move was not in reaction to U.S. President Donald Trump’s tariffs on automobile imports, they said. Reuters adds that the Burnaston site has suffered a decline in production since Brexit. The news should cheer the UK government, as it There’s a sense of relief in the financial markets after Donald Trump delayed his threatened 50% tariffs on all European Union imports into the US. Trump had shocked investors last Friday when he announced he planned a 50% tariff on EU imports from the start of June. But following a call with European Commission president Ursula von der Leyen, that hike in levies has been delayed until 9 July, to give both sides more time to negotiate. Stocks are set to rally in London today, with Wall Street also set to rise, as trading resumes after the bank holiday break Yesterday, France’s CAC index rose by 1.2% while Germany’s DAX gained 1.7%, and the euro hit a one-month high against the US dollar. Tony Sycamore, market analyst at IG, reports that “risk sentiment improved” after Trump announced the delay to his 50% tariffs on the EU. Ipek Ozkardeskaya, senior analyst at Swissquote Bank, cautions that market rallies are on “thin ice”. She explains: European markets are flirting with ATH [all time high] levels, US futures were also up yesterday — but the reality is that with every piece of incoming information, the collective welfare deteriorates. Today, we are in a worse position than we were a month ago. And a month ago, we were in a worse position than we were three months ago. The global trade negotiation period was supposed to last 90 days—and now, it ends all of a sudden. The tariffs won’t be brought below the 10% ‘universal’ level and market rallies are triggered not by good news, but by the least bad of the options — once Trump or his administration softens a previously crazy stance. Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy. Tesla’s sales across Europe halved last month, as the backlash against Elon Musk continues to hurt his electric car company. The latest sales figures from industry body ACEA, released this morning, show that sales of Tesla cars fell by 52% year-on-year in the European Union in April, down to 5,475 units, from 11,540 a year before. They fell 49% in the wider “EU + EFTA + UK” area. The decline follows falls in Tesla sales in Europe in January, February and March, suggesting Musk’s controversial politics and association with the Trump White House are hurting the brand’s popularity, as anti-Musk protests have popped up at Tesla showrooms this year. The overall EU car market grew slightly in April, ACEA reports, with new car registrations rising by 1.3% year-on-year, “despite the ongoing unpredictable global economic environment”. So far this year, new battery-electric car sales have grown by 26.4%, to 558,262 units, capturing 15.3% of the total EU market share. Sigrid de Vries, ACEA’s director general, says: “The share of battery-electric vehicles is slowly gaining momentum, but growth remains incremental and uneven across EU countries.” Tesla’s sales in Europe this year have been disrupted by model changes, as it refreshed its offer with a new Model Y vehicle. But it also faces tough competition from China’s BYD, which sold more EVs than Tesla in Europe for the first time last month, according to market researcher Jato Dynamics. After several months shaking up US bureaucracy through the DOGE initiative, Musk appears to be refocusing on his day job. Last weekend Musk posted that he was “back to spending 24/7 at work and sleeping in conference/server/factory rooms”, as he became “super focused” on his social media company X, artificial intelligence initiative xAI, Tesla and SpaceX. The agenda 10am BST: Eurozone economic sentiment report 11am BST: CBI distributive trades survey of UK retailing 1.30pm BST: US durable goods orders data 2pm BST: US house sales
Author: Graeme Wearden