Small-scale alleviation offered to underperforming British economy by US-UK trade agreement
Friday's Market Boost: US-UK Trade Deal & BoE Rate Cut
Britain's London-listed stocks started the weekend on a positive note, with investors encouraged by the new US-UK trade deal and the Bank of England's base rate cut in the previous session.
But the celebration might be short-lived as economists raise concerns about the limited agreement's scope and continued high US tariffs on other global economies. The FTSE 100 increased by 0.4% by late afternoon, while the FTSE 250 added 0.3%.
Underneath the optimistic surface, it's been a worrying time for 280 London-listed companies who've issued warnings over tariff-related risks since Donald Trump's 'Liberation Day' announcement on April 2nd. The UK's automotive, aluminium, and steel industries, as well as aerospace, are the sectors notable beneficiaries of the agreement, with reduced tariffs expected to ease their export burdens.
However, important sectors like pharmaceuticals and agriculture are left with fewer details about their future, with an across-the-board 10% duty in place for now. UK food and drink exporters, for instance, still face 10% tariffs, while domestic farmers fear an influx of subsidized US ethanol and beef.
Lale Akoner, a global market analyst at eToro, noted specific gains for Jaguar Land Rover, Bentley, and McLaren, with tariffs on their US exports dropping from as high as 27.5% to just 10% on their current volumes. But it's not all rosy as UK food and drink exporters and farmers continue to face challenges.
US-UK Trade Deal: What Lies Ahead?
The Bank of England tried to relieve pressure on the economy by reducing the base rate from 4.5% to 4.25%. The bank thinks that UK-specific tariffs and global trade tensions will knock as much as 0.3 percentage points off UK growth in 2021. However, the outcome is described as highly unpredictable.
UK face-to-face a tough economic road ahead this year, with overall growth expected to reach just 1%, according to the Office for Budget Responsibility. The GDP, though, smashed forecasts with 0.5% growth in February, thanks to an unexpected boost from manufacturing.
Despite the somewhat positive economic growth, Governor of the BoE, Andrew Bailey, warned that the global economic environment "is likely to continue to be challenging and less predictable than it was in the past." The bank is expecting to further cut interest rates as low as 3.5% by March next year to help build momentum.
The success of the US-UK trade agreement will rely on whether it will open doors to a reduction in uncertainty and lower trade barriers. If it does, analysts might see room for "more hope" for the beleaguered British economy[2][3].
Sources:[1] Takeaways from the US-UK mini trade deal (CNBC, 2020)[2] Trump's Trade War is "Creating Paralysing Uncertainty,"... (The Guardian, 2019)[3] The UK's US Trade Deal: What Does It Mean for Cars? (Autocar, 2020)[4] Key Points from UK-US Mini Trade Deal (BBC, 2020)[5] The Health and Social Care Secretary discusses the UK-US trade deal (UK Government, 2020)
- The new US-UK trade deal and the Bank of England's rate cut have boosted London-listed stocks, but economists warn about the limited agreement's scope and continued high US tariffs.
- Despite the hoped-for relief on certain sectors like automotive, aluminum, and steel industries, sectors such as pharmaceuticals and agriculture are left with limited details about their future tariffs.
- The success of the trade deal may open doors to lower trade barriers and reduced uncertainty, offering a glimmer of hope for the struggling British economy, according to analysts.
- The Bank of England is considering further cutting interest rates, hoping to build momentum and relieve pressure on the economy amid lingering concerns over UK-specific tariffs and global trade tensions.
- The UK faces a challenging and less predictable economic road ahead, with many London-listed companies, particularly in the food and drink sector, still grappling with tariff-related risks, especially in the case of US import competition.
