Some Non-Tariff Economic Takes for the UK and Eurozone

Amidst all the recent tariff and political chatter in financial publications we review, some economic data have flown under the radar. Here is a quick review of the latest figures in the UK and eurozone—and what we think the investment implications are.

UK GDP’s Ongoing Chop

After ending 2024 positively, UK gross domestic product (GDP, a government-produced measure of economic output) slipped -0.1% m/m in January, breaking a two-month growth streak.^[i] We observed some headlines (and politicians) pin the contraction on US President Donald Trump’s steel and aluminium tariff threats. But that seems like odd reasoning to us. These data are for January. President Trump didn’t take office until late that month, and steel and aluminium didn’t become specific tariff threats until February.^[ii] Yes, the White House shared its “America First Trade Policy” memorandum on 20 January, but it didn’t issue any official tariff orders until 1 February—and Canada, Mexico and China were the targets, not the UK.^[iii] We saw comments from British steelmakers just this week that only now are US businesses starting to cancel orders.^[iv] Which makes sense to us. Based on our research, tariff threats are generally an incentive to front-run potential changes by ramping up production and shipments before the levies take effect. For instance, potential US tariffs likely drove China’s late-2024 strong export growth as companies acted before new possible policy.^[v]

So the UK production sector’s -0.9% m/m contraction in January, with manufacturing output down -1.1%, is the opposite of what we would think likely to arise from mere tariff talk.^[vi] The largest detractor was basic metals and metal products (-3.3% m/m)—not what we would forecast if firms were trying to get ahead of possible steel and aluminium tariffs.^[vii] Digging in, we find this category has had several big drops in recent months, making January’s slide part of the longer-running trend.^[viii] Seems to us like the industry is, at least in part, dealing with the fallout of gradually shifting steel mills’ blast furnaces to electric arc furnaces, which requires idling production for a spell.^[ix] The Port Talbot steel mill has been closed for construction since September 2024, leaving production capacity spotty.^[x] So, in our view, the rocky data are evidence of a long-struggling industry in transition, not tariff talk hitting output. Lesson: When investors see claims about data, they can benefit from digging in, testing the reasoning, testing the timelines and trying to find what everyone misses. This is a key part of determining whether sentiment is detached from reality.

Positively, services, which comprise the lion’s share of UK economic output, grew 0.1% m/m.^[xi] Consumer-facing services ticked up 0.1% m/m whilst retail trade (excluding motor vehicles and motorcycles) rose 1.7%.^[xii] In our view, that suggests UK consumer spending is more resilient than appreciated and that businesses aren’t as flimsy as presumed heading into April’s tax hikes.

The economy isn’t ripping off rapid growth, but it also isn’t as poor compared to dim expectations, and overall, January’s numbers indicate 2024’s choppy trend continued into 2025. Despite the monthly contraction, real (inflation-adjusted) GDP still grew 0.2% in the three months to January.^[xiii] The contraction also happens to be the mildest occasional dip in over a year.^[xiv] In our view, monthly GDP says more about the volatility underlying quarterly figures than the actual state of the UK economy. (Exhibit 1)

Exhibit 1: Choppy UK Monthly GDP, January 2023 – January 2025

Source: Office for National Statistics, as of 17/3/2025.

Europe’s Disinflation Continues

The world continues to move away from the hot inflation (economywide price increases) of a couple years ago, with the latest evidence being the eurozone’s four largest economies’ final February inflation figures.^[xv] On a harmonised basis (making the numbers directly comparable across eurozone nations), Germany’s consumer price inflation slowed from January’s 2.8% y/y to 2.6% in February. Meanwhile, France (0.9% y/y), Spain (2.9%) and Italy (1.7%) remained at their January rates.^[xvi]

Taking a step back, inflation has slowed across the board since peaking in October 2022. (Exhibit 2)

Exhibit 2: The Eurozone’s Ongoing Disinflation

Source: FactSet, as of 17/3/2025.

Whilst some experts warn inflation may pick back up, we think fundamentals suggest otherwise. There is a deep trove of economic research showing inflation is a monetary phenomenon—too much money chasing too few goods and services. Our research suggests 2022 – 2023’s hot inflation was tied to the pandemic, when monetary policy institutions worldwide pumped new money into their economies in an effort to boost demand.^[xvii] That money supply spike, along with goods shortages and supply chain issues, caused prices to surge, in our view. The eurozone has since worked through much of that pandemic-driven excess, and today, money supply is mostly below prepandemic growth rates—not a period known for hot eurozone inflation.^[xviii] (Exhibit 3)

Exhibit 3: Eurozone Money Supply Growth

Source: European Central Bank, as of 17/3/2025. Eurozone M3, year-over-year change, monthly, January 2015 – January 2025.

What to Make of Eurozone Heavy Industry’s January?

Eurozone industrial production rose 0.8% m/m in January, beating expectations of 0.6% and rebounding from December’s -0.4%.^[xix] We saw some observers sensibly suggest January’s growth likely reflected some tariff frontrunning—a striking contrast with the aforementioned UK. Further bolstering the point, much-maligned German industrial production grew 2.3% m/m in January thanks to its automotive industry (6.4%)—a sector that has long warned about the negative downstream consequences of possible US tariffs.^[xx]

Whilst it is premature to declare the Continent’s heavy industry struggles over, we also don’t think Europe’s economic prospects rely solely on its industrial core. Eurozone GDP has expanded since Q3 2023’s tiny quarterly contraction (-0.01% q/q) thanks largely to Southern Europe.^[xxi] Yet we have read many economists describe Spain, Portugal Italy and Greece’s economic contributions as less real than Germany’s. The presumption, based on our coverage: Southern Europe’s reliance on tourists’ spending at museums, luxury stores and hotels allegedly isn’t as sustainable as the core’s factory production.

We disagree with this take. Both tourism and exported manufactured goods (e.g., autos) contribute to GDP. The former is a service, and services comprise over 70% of Europe’s economic activity.[xxii] Tourism and manufacturing alike often rely on strong international demand, which is why China’s soft patch was such a headwind for Germany.^[xxiii] And plenty of local residents and businesses consume local services, too. In our view, it is a fallacy to say one is inherently a more enduring source of growth than the other. (Heck, Rome, Venice, Barcelona and so many other European destinations have been major tourist destinations as pleasure travel became more commonplace across the last century, based on our experience.) Our analysis shows both rely on domestic and international demand and inputs and both are sensitive to economic conditions. It is just that one you can touch physically and one you can’t. So the perceptions about services and tourism being flimsier sources of growth seem more rooted in bias than reality, in our view.

Still, the consensus view is that as go Germany and its factories, so goes the Continent. We think industrial production’s improvement can help sentiment and show investors economic conditions aren’t as poor as commonly believed. That ok reality is likely sufficient to exceed investors’ dour outlooks—and send stocks up the proverbial wall of worry.