Market Update – January 2025
January has been full of key events that could define 2025. The UK faces muted growth in the months ahead, with questions hanging over the government’s legitimacy and tax agenda as the Spring Budget approaches. Markets have been volatile following the news of China’s artificial intelligence (AI) startup, Deepseek, whilst new US tariffs raise questions over the global outlook for economic growth and trade.
UK policy
The UK appears ready to change its relationship with the European Union (EU). Prime Minister Keir Starmer headed to an EU leaders’ meeting (the first UK visit since Brexit) to “reset” relations and build stronger ties on defence and security, crime and trade.
A youth mobility scheme is on the table. This could allow UK nationals under 30 to live in an EU country for up to 4 years. However, Labour is outwardly rejecting this EU proposal, branding it a form of “freedom of movement”.
In the background, European powers have two main geopolitical events in mind: the ongoing Ukraine war and the recent re-election of Donald Trump to the US presidency. Both threaten to squeeze the continent for regional stability and economic growth (due to tariffs).
At home, the government’s popularity continues to suffer. Only 27% approve with the Prime Minister’s performance, with the economy at the forefront of voters’ minds. Most (65%) expect the economy to get worse in 2025.
The UK economy
In mid-January, the OECD (Organisation for Economic Development) lifted its forecast for UK GDP growth in 2025 from 1.2% to 1.7%. However, geopolitical issues hang over the economy.
The economy could be lifted in 2025 if the Bank of England (BoE) follows through with its recent hints of further interest rate cuts. The Governor, Andrew Bailey, is expected to make three cuts – potentially leaving the base rate at 4% by the end of the year.
Whilst this could depreciate the currency (possibly leading to outflows of investor money), it may encourage more households to spend money due to decreasing savings rates. This could help raise consumer and business confidence. Both are on a downward trend.
Nonetheless, investors’ concern about further tax rises in 2025 could offset potential growth from cut rates. Over 8 in 10 remain concerned about further hikes after the Autumn Budget in 2024. If households feel insecure about their finances, they may resist consumption.
The UK market
Despite economic concerns, the FTSE 100 reached another record high in January – achieving its best month in over two years. A big driver appears to be the recent tech sell-off in the US following news of China’s new AI solution (Deepseek).
Optimism is fairly high about the UK market, with two-thirds of investors expecting the index to be higher by the end of the year.
The FTSE 100 is widely regarded as “cheap” on the global stage, and investors are eying up its mining, oil and gas companies as a potential place of “safety” amidst potential trade wars between the US and others.
Cuts to the base rate may also be driving investor interest due to the possibility of cheaper corporate borrowing. Private equity (unlisted companies) could also become attractive as tax rules shift concerning business relief and pensions in 2026 and 2027, respectively.
The Global Outlook
As the month progressed, attention naturally turned to the inauguration of President Trump on 20th January 2025. As he took office, Trump made positive remarks towards artificial intelligence (AI) and cryptocurrency.
A case in point was Trump’s signing of the President’s Executive Order (EO) on digital financial technology, introducing measures such as banning CBDCs (Central Bank Digital Currencies) and securing industry-backed stablecoins.
This initial momentum towards US tech was interrupted as news arrived from China, where the latest version of Deepseek was released on Trump’s inauguration day. Markets initially reacted with concern, leading to chip-making giant Nvidia shedding almost $600bn – the biggest one-day loss in US history.
The panic was short-lived, however, as investors digested China’s new AI. Concerns about the AI bot’s data security and censorship have calmed the US tech market more. Trump himself has welcomed more AI competition and described the news as a “wake-up call” for the sector.
Now, tariffs are increasingly dominating the headlines. On 1 February, the White House stated that it was imposing 25% duties on imports from Canada and Mexico. China would face a 10% rate. The news quickly led to a rise in the US dollar (USD).
In Europe, the Stoxx Europe 600 index quickly fell as the President threatened to impose tariffs on the EU. Uncertainty hangs over the UK, too, with Donald Trump describing the country as “out of line” but softening his tone by stating a deal “can be worked out”.
Canada and Mexico quickly responded that they would impose tariffs of their own on US imports to their countries. The EU has also warned it will retaliate if President Trump follows through on tariffs for the continent, which could hurt stocks such as car manufacturers.
Asian markets (the first to open following Trump’s statements) tumbled significantly. Shares of companies listed in Tokyo, Seoul and Hong Kong fell on Monday morning. However, time will only tell whether this is the start of a global chain reaction.
China has responded aggressively, threatening its own tariffs and warning it could take the US to court – arguing it is violating World Trade Organization rules.
