On that note, we are wrapping up for the week – a week that’s seen new tariffs imposed or threatened by Donald Trump, and the EU and Canada announcing countermeasures.

The UK, Australia and other countries have preferred what Keir Starmer calls a “pragmatic approach” (as the UK is trying to negotiate a wider economic deal with the US).

But even Elon Musk’s Tesla has warned that Trump’s trade war could expose the electric carmaker to retaliatory tariffs that would also affect other automotive manufacturers in the US.

Today, news that the UK economy shrank by 0.1% in January, which came as a surprise to economists, has created a headache for Rachel Reeves, the chancellor, who will present her spring statement on 26 March.

Germany’s incoming chancellor Friedrich Merz said today that he has secured the crucial backing of the Green party for a massive increase in state borrowing and reform of debt rules, clearing the way for the outgoing parliament to approve it next week.

The news sent European shares, government bond yields and the euro soaring. Germany’s Dax rose by 1.7% and the French and Italian markets are up by 1.2% and 1.6% respectively, while the UK’s FTSE 100 has gained 0.9%.

Wall Street also rallied, with the S&P 500 up 1.6%, the Dow Jones 1.2% higher and the Nasdaq gaining 1.8%, despite a gloomy consumer sentiment survey from the University of Michigan.

Have a great weekend. We’ll be back next week. – JK

On Wall Street, US stocks are also trading higher but pared some gains after the University of Michigan’s consumer sentiment survey was released.

The headline index plunged to 57.9, from 64.7, and now sits at its lowest level since November 2022. The survey also showed long-term inflation expectations rising to 3.9%, the highest level since 1993.

As oil prices have dropped back recently, the increase reflects entirely consumers’ increasing concerns about the impact of tariffs, Capital Economics notes. Indeed, the accompanying commentary noted that sentiment slid across “all groups by age, education, income, wealth, political affiliations, and geographic regions”.

The Dow Jones has gained 261 points, or 0.6%, to 41,074 while the Nasdaq is 1.4% ahead and the S&P 500 has bounced back 1%, following yesterday’s 1.4% slide.

One bit of uncertainty hanging over Wall Street may be clearing after the Senate made moves to prevent a possible partial shutdown of the US government, with a deadline looming at midnight. But the escalating trade war is a persistent worry for investors.

The stock rally won’t be enough to keep Wall Street from a fourth straight losing week, which would be its longest such streak since August.

Germany’s incoming chancellor Friedrich Merz said he had secured the crucial backing of the Green party for a massive increase in state borrowing and reform of debt rules, clearing the way for the outgoing parliament to approve it next week.

Merz’s conservatives and the Social Democrats, who are in negotiations to form a government after the national election last month, have proposed a €500bn fund for infrastructure and sweeping changes to borrowing rules to bolster defence and revive growth in Europe’s largest economy.

With the support of the Greens, they now have the two-thirds majority necessary to pass constitutional amendments, with a vote scheduled for Tuesday. Merz had justified the need to push the package through the outgoing parliament after recent shifts in US policy under president Donald Trump, warning that a hostile Russia and an unreliable US could leave Europe exposed.

Merz said at a press conference:

It is a clear message to our partners .. but also to the enemies of our freedom: We are capable of defending ourselves.

Germany is back. Germany is making a significant contribution to the defence of freedom and peace in Europe.

News of the deal lifted eurozone government bond yields, shares across Europe and the euro, with hopes that the borrowing plan will be a boost to all of Europe.

Germany’s benchmark Dax stock index rose by almost 2%, while the mid- and small-cap indexes rose more than 3% each. The euro rose by 0.5% against the dollar, taking its gains so far this month to 5%.

The compromise reached with the Greens includes an allocation of €100bn for the climate and economic transformation fund from the €500bn earmarked for infrastructure, Merz said.

It also includes a change to the constitution that would see spending on defence, civil and disaster protection, intelligence services, information security exempt from borrowing limits – the controversial Schuldenbremse or debt brake – if they exceed 1% of economic output.

The reforms will mark a rollback of those strict debt rules, imposed after the 2008 global financial crisis that have since criticised as being outdated and putting Germany into a fiscal straitjacket.

Carsten Brzeski, global head of macro at ING, said:

With today’s plan, the debt brake might not be entirely dead but rather buried alive.

The only limiting fiscal rule for the German government will be the (EU) Stability and Growth Pact. And we know from past experiences that these rules can be soft as butter if needed.

In the latest twist, the United States has asked Denmark and other European nations if they can export eggs as Americans face surging egg prices, the Nordic country’s egg association said on Friday.

The request from the US Department of Agriculture coincides with a raft of new US tariffs on countries, including in Europe, and the threat of more.

There has been a shortage of eggs in the US for some time, driving up prices sharply, following an outbreak of bird flu and other factors.

Donald Trump promised to lower egg prices on his first day in office, but prices increased 59% on a year-on-year basis in February, the first full month of his administration.

Trump has also threatened economic sanctions unless Denmark hands over control of Greenland to the US, and said this week that he thought the US would eventually annex it – despite its status as an autonomous territory of Denmark, a member of the European Union.

A letter reviewed by Reuters showed that a representative of US Department of Agriculture in Europe had sent formal inquiries to egg-producing countries in late February seeking information on their ability and willingness to export eggs to the American market.

The sprawling ArcelorMittal Dofasco steel plant in Hamilton, Ontario has in recent months become a site of pilgrimage for Canadian political leaders.

Dressed in pristine orange coveralls and hard hats, prime ministers and provincial premiers gaze at coiled sheets of steel with the stern grimaces and keen interest of generals reviewing a military parade.

And, in the eyes of many Canadians, the country is already in a state of conflict.

This week, after a string of feints and retreats, a phony trade war came to an end as Donald Trump threatened to inflict “a financial price … so big that it will be read about in History Books for many years to come”.

And so, barely 48 hours after winning the race to lead the ruling federal Liberal party, Canada’s prime minister-designate, Mark Carney, became the latest politician to head to Dofasco.

The former governor of the Bank of England and the Bank of Canada criticized the “unjustified” tariffs and said he was willing to sit down with Trump, as long as the president showed “respect for Canadian sovereignty”.

That remained in doubt: just a day earlier, Trump had restated his argument that Canada should become the “cherished Fifty First State”, adding: “The artificial line of separation drawn many years ago will finally disappear.”

Such talk might once have been dismissed as harmless trolling or perhaps a strategy to win trade concessions, but Canadians are taking Trump at his word – and readying for a worsening of relations.

Andrea Horwath, the mayor of Hamilton, said:

Nobody wants to be here. Nobody wants a trade war. But here we are and I can say one thing – we’re not going to roll over.

We’ve seen a powerful Team Canada approach across the country because at this moment, fracturing is not an option. Instead, we’re seeing Canada at its finest.

That unity has come in the form of a “buy Canada” movement, boycotts of leisure travel to the United States, cancellation of entertainment subscriptions and a rallying cry of “Elbows Up” – a reference to energetic tackles in ice hockey.

Incoming German chancellor Friedrich Merz has reached an agreement with the Greens today on a massive increase in state borrowing, just days before a parliamentary vote next week, Reuters is reporting, citing a source close to the negotiations.

A debt deal compromise is being examined by finance ministry officials, parliamentary sources said. Merz’s conservatives and the social democrats hammered out the deal but need the support of the Green party to get the proposed reform of debt rules and massive increase in state spending through parliament, as they require a two-thirds majority for necessary constitutional changes.

News of the deal sent euro zone government bond yields, shares and the euro soaring.

The German Dax jumped as much as 1.8% and is now 345 points ahead at 22,922, a near-1.6% rise. The French and Italian markets are 1.1% and 1.3% ahead, respectively, while the UK’s FTSE 100 has climbed by 55 points, or 0.6%, to 8,597.

The euro is 0.4% higher, rising back above $1.09 to $1.0901, and bond yields jumped on the prospect of higher borrowing.

Another source said some details were still being hammered out.

Merz, a former investment banker who flies his own private plane, wants the outgoing German parliament to approve a €500bn fund for infrastructure and sweeping changes to borrowing rules – known as the Schuldenbremse, or debt brake – to kickstart economic growth and ramp up defence spending in Europe’s largest economy.

The politician whose conservatives won a national election last month is racing to secure the funds before a new parliament convenes on 25 March, where they risk being blocked by an expanded contingent of far-right and far-left lawmakers.

Reports just in that Germany’s incoming chancellor Friedrich Merz has reached a deal with the Green party on the proposed borrowing bonanza, to allow higher spending on infrastructure and defence.

This has sent stocks on the Dax soaring by 1.7% to a one-week high, amid hopes for a boost to the economy, while bond yields are also sharply higher on the prospect of rising government borrowing.

The yield, or interest rate, on the benchmark 10-year, jumped as high as 2.93% and are now 5 basis points higher at 2.91%.

The euro reversed earlier losses to trade 0.4% higher against the dollar at $1.0896.

Spot gold has just broken through $3,000 an ounce, as investors are rushing into safe-haven assets.

Gold has risen by 0.5% to $3,004.86 an ounce, a fresh record high.

Paul Williams, managing director of Solomon Global, a specialist supplier of certified gold and silver bars and coins, said:

Gold breaching the psychologically significant $3,000 level is a direct response to escalating trade tensions and the growing economic uncertainty that this brings.

Trump’s latest tariff threat, a potential 200% duty on EU alcohol imports, has sent further shockwaves through global markets, fuelling demand for safe-haven assets. This isn’t just a knee-jerk reaction to individual policies; it’s investors seeking protection against systemic risk. Given the current momentum, gold at $3,500 by summer and $4,500 within the next year are in the realms of possibility.

With the Trump tariff turmoil spooking markets once again, gold is being chosen as the ultimate shield against political and economic unpredictability.

Even Tesla is getting worried about Donald Trump’s trade policies.

Elon Musk’s Tesla has warned that Donald Trump’s trade war could expose the electric carmaker to retaliatory tariffs that would also affect other automotive manufacturers in the US.

In an unsigned letter to Jamieson Greer, the US trade representative, Tesla said it “supports fair trade” but that the US administration should ensure it did not “inadvertently harm US companies”.

Tesla said in the letter:

As a US manufacturer and exporter, Tesla encourages the Office of the United States Trade Representative (USTR) to consider the downstream impacts of certain proposed actions taken to address unfair trade practices.

The company, led by Musk, a close ally of Trump who is leading efforts to downsize the federal government, said it wanted to avoid a similar impact to previous trade disputes that resulted in increased tariffs on electric vehicles imported into countries targeted by the US.

European stock markets are pushing higher, while the pound and the euro have weakened slightly against the dollar.

The FTSE 100 index in London has risen by 28 points to 8,570, a 0.3% gain. The German Dax is 0.46% ahead while the French CAC climbed by 0.7% and the Italian FTSE MiB is up by 0.36%.

AJ Bell investment director Russ Mould explained:

The FTSE 100 looked set to end the week on a positive note, supported by sterling weakness after an unexpected drop in UK GDP.

While Wall Street entered official correction territory overnight, Asian stocks shrugged off this weakness as Chinese authorities introduced measures aimed at boosting consumer spending. This helped give the mining sector in London a lift as investors looked for a knock-on impact on metals demand in a commodity-hungry economy.

Gold hit a fresh record high on the latest tariff moves by the US, with threatened punitive levies on alcohol from the EU. Doubts about the Ukraine-Russia peace deal added to the uncertainty.

Despite today’s gains, also in Asia, global stocks are on track for their worst week since September, while gold hit a record high. Investors are concerned about the escalating trade war triggered by Donald Trump’s frequent tariff announcements hitting a wide range of goods from metals to whisky, which have led the EU and Canada to retaliate.

MSCI’s all country world stock index is down by 1.1% today, and is 3.4% so far this week.

Spot gold has risen by 0.4% to $2,999.39 an ounce.

In currency markets, the pound and the euro are both about 0.1% lower against the dollar, at $1.2928 and $1.1912 respectively.

Michael Strobaek, global chief investment officer at Lombard Odier, told Reuters:

I think Trump 2.0 is nothing like Trump 1.0. This time, the president seems prepared to let US markets and the economy suffer while he implements his ‘America first’ goals.

Steven Rattner, an investor and journalist, said:

Inflation in Germany, Europe’s largest economy, dipped to 2.6% last month, lower than previously thought.

The country’s federal statistics office (Destatis) had initially estimated that annual inflation, harmonised to compare with other EU countries, remained at 2.8% for the second month in a row.

It has also revised down the month-on-month change in inflation to 0.5% from 0.6%. Destatis did not give a reason for the revisisions.

The national measure of inflation stayed at 2.3% in February, unrevised. Food and services prices drove up inflation while energy prices had a downward effect on the consumer price index.

Let’s look at the GDP figures in more detail.

The 0.9% drop in production output in January, which came after 0.5% growth in December, was mainly caused by a 1.1% slump in manufacturing while mining and quarrying also declined. Basic metals and metal products were down along with pharmaceutical products.

Retailers fared better.

The ONS said the largest positive contributions to services in January came from retail (excluding car sales), up 1.7%; scientific research and development, up 5.5, and rental and leasing activities, up 3%.

Here’s some instant analysis from our economics editor Heather Stewart:

For a government that has made growth its overriding mission, the 0.1% decline in GDP in January signalled by the office for national statistics on Friday will be depressing news.

As Rachel Reeves prepares to deliver her spring statement on 26 March, the economy appears to be going in the wrong direction – underlining the fact that the Office for Budget Responsibility is likely to have presented her with notably weaker forecasts than in October.

These monthly data are more volatile than the closely-watched quarterly growth rates and can often be revised; but it appears the UK was stagnating even before Donald Trump began tearing up the global trading system.

The ONS blamed weak manufacturing output, down by 1.1% on the month, and construction, which fell by 0.2%, for the poor GDP readout. Services output expanded, though only by 0.1%.

Within construction, the issue was a 0.7% a decline in new work, the number-crunchers said – a worrying signal, given the government’s commitment to building 1.5m new homes over this parliament.

While it does not appear to point to a recession, that remains a relatively weak backdrop, against which the UK’s firms are now having to wrestle with the uncertainty created by the White House’s on-off tariffs policies.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The UK economy unexpectedly shrank in January following a decline at factories.

GDP is estimated to have fallen 0.1% in January, mainly caused by a 0.9% fall in the production sector, according to the Office for National Statistics. This comes after 0.4% economic growth in December. Economists had expected the economy to grow by 0.1% in January.

It was a poor month for manufacturing and construction, both in decline, while the dominant service sector eked out meagre growth. The news dealt a blow to the chancellor, Rachel Reeves, ahead of her spring statement in two weeks’ time.

Monthly services output grew by 0.1% in January, following 0.4% growth in December, while construction output fell by 0.2% following a same-sized decline in December.

GDP is estimated to have grown by 0.2% in the three months to January, compared with the three months to October, mainly because of growth in the services sector.

Asian stock markets are mostly up, despite a sell-off on Wall Street sparked by Donald Trump’s tariff policies. Yesterday, Trump threatened to hit imports of wine, cognac and other alcohol from the European Union with a 200% tariff.

The escalating trade war dragged the S&P 500 on Wall Street more than 10% below its record, set just last month. A 10% decline from a recent peak is known as a “correction” — and Thursday’s 1.4% slide in the S&P 500, a key US stock market index, sent it to its first correction since 2023.

Gold futures surged through $3,000 an ounce last night, but is down slightly at $2,986 at present. The value of gold has nearly doubled in the past five years.

Chinese stocks led the gains in Asia amid expectations of policy support from Beijing, with top government officials set to hold a press briefing on Monday. The Shanghai exchange rose by 1.7% while the Shenzhen market bounced by 2.1%, and Hong Kong’s Hang Seng climbed by 2.2%. Japan’s Nikkei was up by 0.7%.

Stock market futures are pointing to a higher open in Europe and on Wall Street later.

There is some relief after top US Senate Democrat Chuck Schumer signalled his party would provide the votes to avert a government shutdown in the US.

The Agenda

• 2pm GMT: US Michigan Consumer sentiment for March