Tariffs Drive UK and Eurozone Growth Downgrades: Sterling Update

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GBP

The UK economy is projected to experience a significant slowdown over the next two years, largely due to the impact of tariff uncertainty , which has adversely affected consumer spending and business investment.

This outlook is supported by the EY Item Club, a prominent UK economic forecasting group and sponsored by the major accountancy firm EY, which has reported a record low confidence in the British economy. Their latest forecast predicts UK GDP growth of just 0.8% this year, a downgrade from the previous estimate of 1% in February, and has further revised the 2026 forecast from 1.6% to 0.9% due to anticipated long-term effects.

Additionally, the International Monetary Fund (IMF) has recently downgraded its growth forecast for the UK this year to 1.1%, from the 1.6% forecasted in January. The Governor of the Bank of England, Andrew Bailey, has also warned that the UK is facing a “growth shock” as a direct consequence of Trump’s trade policies.

In terms of data releases for the UK, last week, the spotlight was on the UK’s Purchasing Managers’ Index (PMI) data. The Flash Manufacturing PMI came in as forecast at 44.0, while the Flash Services PMI fell below expectations to 48.9, indicating contraction in both sectors. Looking ahead, it’s a relatively quiet week, with the focus on the Final Manufacturing PMI release on Thursday.

EUR

The European Central Bank (ECB) is taking proactive measures to mitigate the economic impact of the US tariffs. Members of the ECB are preparing to lower interest rates further. This decision is driven by the expectation that the US tariffs will cause prolonged economic harm to the eurozone, regardless of any potential easing from the Trump administration.

Francois Villeroy de Galhau, a member of the ECB’s Governing Council and the Governor of the Bank of France, attempted to reassure the public and markets this morning, that despite the economic challenges posed by the US tariffs, by suggesting the ECB still had a “gradual margin for rate cuts”.

This week, key economic data releases include the Spanish Consumer Price Inflation (CPI) on Tuesday, which is forecast to decline from 2.3% to 2.0%. On Wednesday, the German Preliminary CPI is expected to show a slight increase from 0.3% to 0.4%. Finally, the eurozone’s CPI flash estimate, due on Friday, is anticipated to drop from 2.2% to 2.1%, potentially highlighting underlying economic challenges.

USD

The US treasury secretary Scott Bessent has indicated that “there is a path” to tariff agreement with China, following recent discussion with Chinese officials in Washington. Bessent acknowledged conflicting signals but stressed that the high tariff levels are unsustainable for China and believes that de-escalation is necessary and that an agreement in principle could be reached.

There are growing concerns on Wall Street that the tariffs imposed by President Donald Trump could have a significant impact on supply chains, which has not yet been fully felt by US consumers. This uncertainty is causing concern among investors and businesses.

Cargo shipments from China to the US have plummeted by up to 60% since the US increased tariffs to 145% in early April. This sharp decline is already causing delays and disruptions, with companies’ dependent on imported goods, facing substantial challenges. It’s been reported that American consumers can expect shortages and higher prices in the near future as a result.

A data-rich week lies ahead for the US, starting with the release of JOLTS Job Openings on Tuesday, which are projected to decline from 7.57 million to 7.48 million. On Wednesday, the ADP-Non Farm employment change is expected to decline from 155K to 123K, followed by Advance GDP expected which is forecasted to drop from 2.4% to 0.4%.

The Employment Cost Index is expected to remain stable at 0.9%, while the Federal Reserve’s preferred inflation measure, the Core PCE Price Index, is expected to contract from 0.4% to 0.1%. Unemployment Claims, due on Thursday, are forecasted to remain relatively unchanged from last week’s figure of 222,000. Additionally, the ISM Manufacturing PMI is expected to contract from 49.0 to 48.0.

Rounding up the week, Non-Farm Payrolls are projected to come in below last month’s figure, expected to print at 129,000 versus forecasts of 228,000. The Unemployment Rate is forecasted to remain steady at 4.2%, and average hourly earnings month-over-month are expected to hold at 0.3%.