Growth trickles up

• European equities, which advanced +2.4% in sterling terms
• Sterling, which strengthened +1.5% against the dollar and c.+2.0% against the yen

• Japanese equities in sterling terms, which declined - 1.3% despite a nominal advance of +0.9

UK Gross Domestic Product (GDP) unexpectedly grew in the final quarter of 2024 according to official figures from the Office for National Statistics (ONS) released last week. The economy eked out a +0.1% quarter-on-quarter advance, defying economists’ expectations of a -0.1% decline. The quarter was boosted by increases in output from both the services and the construction sectors, with growth in December particular stronger than expected (+0.4%). The final quarter’s figures mean that GDP for 2024 as a whole grew by +0.9%, following growth of +0.4% in 2023. However, the positive surprise was tainted by the fact that GDP per head actually fell -0.1% in 2024 when adjusted for a rising population, underlining the prevailing pressures on living standards and the public finances.

The outlook for 2025 remains cautious too, as the ONS report also suggested business investment fell by a notable -3.2%, likely due to the impending tax rises companies are having to brace themselves for following October’s Autumn Budget. While the economy’s resilience in Q4 last year will be of some comfort to the government – Britain was notably the best performing major European economy - cautious business sentiment is likely to mean private sector activity remains subdued in the first half of the year.

Consumer Price Index (CPI) Inflation in the US rose by +0.5% in January, up from December’s reading and higher than an anticipated +0.3% rise. This led to the year-on-year print rising to a six-month high of 3%, a notch above expectations of 2.9%. The increase in prices was broad based, occurring across a number of the inflation basket constituent parts, but the increase in grocery prices was particularly notable, as egg prices soared by +15% over the month, continuing a rapid increase driven by an avian flu outbreak which has caused supply to dwindle. Core inflation, which excludes the more volatile components like food and energy, rose by +0.4% in January and +3.3% year-on-year – again slightly above expectations of +3.1%.

The more elevated prints are likely to reinforce the view that the US Federal Reserve (Fed) will need to adopt a more cautious approach to cutting interest rates – particularly as the Trump administration’s policy agenda is likely to raise taxes on goods entering the US through tariffs, and potentially suppress labour supply growth through tighter immigration controls. Nevertheless, it is often the case that January can be a ‘busy’ month for US CPI, as start-of-year prices increases are implemented, while the significant shelter component of the inflation basket operates on a long lag and prices rises in this area continue to steadily slow.

Elsewhere, January’s Retail sales data showed a decline of -0.9% month-on-month, far worse than the anticipated - 0.1% drop. However, the drop in consumer spending was likely to have been primarily driven by severe weather and the LA wildfires, rather than any significant shift in US consumer sentiment.

France hosted the keenly observed Artificial Intelligence (AI) Action Summit last week. Gathering at the Grand Palais, leaders and stakeholders from both the public and private sector convened for discussions focused on three critical areas: accelerating global AI development, managing the AI transition while protecting individual freedoms, and aligning AI with Human values. In the opening speech, French President Emmanuel Macron announced a €109bn AI investment plan within France “over the coming years”. The investment, which is expected to include foreign and private sector funds as well as public money, was framed as necessary to being part of the race to innovate in the AI field and comes a month after US President Donald Trump announced a $500bn AI infrastructure project known as Stargate.

The UK and US ultimately decided to not sign a declaration on ‘open’ ‘inclusive’ and ‘ethical’ AI development following the summit. The document, which was intended to be an international agreement on AI proliferation which aimed to reduce digital divides across the globe, was signed by 60 other nations, including China, India, Japan, Australia and Canada. The UK government cited concerns over national security and ‘global governance’ as reasons why it could not sign the declaration at this stage, although the UK did put pen to paper on other agreements concerning AI sustainability and cybersecurity at the summit. US Vice President, JD Vance, warned of the need to reject the idea that cautious AI regulation was needed, suggesting that too much regulation could ‘kill a transformative industry just as it’s taking off’. The firmer US stance comes as the race to maintain a leading position in the field hots up, with the recent arrival of Chinese AI application, DeepSeek, challenging US players such as OpenAI.