Some Non-Tariff Economic Takes From Across the Pond

Amid all the recent tariff and political chatter, some economic data have flown under the radar. Here is a quick review of the latest figures from across the pond and what we think the investment implications are.

UK GDP’s Ongoing Chop

After ending 2024 positively, UK GDP slipped -0.1% m/m in January, breaking a two-month growth streak.^[i] Some headlines (and politicians) pinned the contraction on President Donald Trump’s steel and aluminum 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 aluminum didn’t become specific tariff threats until February. Yes, the White House shared its “America First Trade Policy” memorandum on January 20, but it didn’t issue any official tariff orders until February 1—and Canada, Mexico and China were the targets, not the UK. We saw comments from British steelmakers just today that only now are US businesses starting to cancel orders. Which makes sense to us. 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.

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 expect to arise from mere tariff talk.^[ii] The largest detractor was basic metals and metal products (-3.3% m/m)—not what we would expect to see if firms were trying to get ahead of possible steel and aluminum tariffs. Digging in, we find this category has had several big drops in recent months, making January’s slide part of the longer-running trend. 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 production idling for a spell. A large Welsh steel mill has been closed for construction since September 2024, leaving production capacity spotty. So, in our view, the rocky data are evidence of a long-struggling industry in transition, not tariff talk hitting output. Lesson: When you see claims about data, dig in, test the reasoning, test the timelines and try 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.^[iii] Consumer-facing services ticked up 0.1% m/m while retail trade (excluding motor vehicles and motorcycles) rose 1.7%.^[iv] 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 GDP still grew 0.2% in the three months to January.^[v] The contraction also happens to be the mildest occasional dip in over a year. 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 3/17/2025.

Europe’s Disinflation Continues

The world continues to move away from the hot inflation of a couple years ago, with the latest evidence being the eurozone’s four largest economies’ final February inflation figures. On a harmonized basis (making the numbers directly comparable across eurozone nations), Germany’s CPI 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.^[vi]

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 3/17/2025.

While some experts warn inflation may pick back up, fundamentals suggest otherwise. Inflation is a monetary phenomenon—too much money chasing too few goods and services. 2022 – 2023’s hot inflation was tied to the pandemic, when central bankers worldwide pumped new money into their economies to boost demand. That money supply spike, along with goods shortages and supply chain issues, caused prices to surge. 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. (Exhibit 3)

Exhibit 3: Eurozone Money Supply Growth

Source: European Central Bank, as of 3/17/2025. 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%.^[vii] Some observers sensibly suggested 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.^[viii]

While 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.^[ix] Yet many observers view Spain, Portugal Italy and Greece’s economic contributions as less “real” than Germany’s. The presumption: 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.^[x] Tourism and manufacturing often rely on strong international demand, which is why China’s soft patch was such a headwind for Germany. 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.) Both rely on domestic and international demand and inputs. 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.

Still, the consensus view is that as goes Germany and its factories, so goes the Continent. 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 the bull market up the proverbial wall of worry.