The Weekly Echo (28/01/25)

Introduction

Welcome to the latest edition of The Weekly Echo! This week, we delve into significant developments impacting the global economy. There's much to explore from NVIDIA's stock plunge due to emerging AI competition and Tesla's legal battle against EU tariffs to a notable conversation between President Trump and Prime Minister Starmer, shifts in the UK's economic indicators, and President Trump's tariff threats. Let's break down these events and their economic implications in an accessible way.

1. NVIDIA's Stock Decline Amid New AI Competition

Nvidia initially sold CPU chips for gaming, however, the company managed to capitalise on the AI boom and has become one of the most recognised organisations in the world. The leading technology company known for its advanced computer chips recently experienced a significant drop in its stock price. NVidia’s shares fell by 17%, resulting in a substantial loss in market value. 

This decline was triggered by the emergence of DeepSeek, a Chinese startup that developed a new artificial intelligence (AI) model. DeepSeek's innovation raised concerns about increased competition in the AI sector, leading investors to worry about NVIDIA's future market share and profitability. When investors anticipate that a company's future profits might decrease due to competition, they often sell their shares, causing the stock price to drop.

The new Chinese AI language was developed at a fraction of the cost of its ChatGPT counterpart. However, the shockwaves impacting investor confidence may be an overreaction as the new AI ‘Deepseek’ was trained on Nvidias CPUs. Therefore, we may see a bounce back in Nvidia's share price as investors may see this price point as an opportunity to buy at a discount.

2. Tesla Challenges EU Tariffs on Chinese-Made Electric Vehicles

Tesla has initiated legal action against the European Commission in response to new tariffs imposed on electric vehicles (EVs) manufactured in China. The European Union (EU) introduced these tariffs, alleging that Chinese manufacturers receive unfair government subsidies. Tesla, which imports many of its European vehicles from its Shanghai factory, is directly affected by these tariffs. 

Tariffs are taxes imposed on imported goods to make them more expensive, thereby encouraging consumers to buy domestic products. In this case, the EU's tariffs aim to protect European car manufacturers from competition with subsidised Chinese EVs. The tariffs will allow domestic car makers to benefit from more competitive pricing despite the mass government subsidiaries.

Tesla is currently paying significantly lower tariffs of 7.8% on exports from its’ Shanghai factory in comparison to rates of 35.3% paid by its Chinese counterparts. However, Musk believes these tariffs are unfair and could harm its competitiveness in the European market. If Tesla succeeds, it could lead to lower prices for consumers but might also impact European carmakers increasing the competitiveness of Tesla.

3. President Trump and Prime Minister Starmer's Upcoming Meeting

In a recent phone conversation, U.S. President Donald Trump and UK Prime Minister Sir Keir Starmer emphasised the strong relationship between their countries and agreed to meet soon. 

Meetings between leaders of major economies like the U.S. and the U.K. are significant because they can influence economic policies, trade agreements, and international relations. Positive relations can lead to agreements that facilitate trade, benefiting businesses and consumers in both countries. For example, they might discuss reducing trade barriers, which could make it easier and cheaper for companies to export and import goods.

Starmer is reportedly set out to secure more investment for the UK economy in a time when economic growth is limited. Building strong relationships could mean great relationships with US multinationals. Although, before this can happen there are some key issues to be resolved, with Trump suggesting the UK and the rest of Europe should spend more on military budgets, while the UK has proposed to cede sovereignty over the Chagos Islands.

This meeting could be key in determining the nature of the US-UK relationship over the coming years and could be a vital chance for the UK economy to secure funding for future growth.

4. UK's Economic Indicators: Slight Growth Amid Rising Costs

The UK's economy showed a slight improvement in January, with the Purchasing Managers' Index (PMI) rising to 50.9 from 50.4 in December surprising many forecasters. The PMI is an indicator of economic health for the manufacturing and service sectors; a reading above 50 suggests expansion while below 50 is a contraction.

The marginal expansion suggests that Economic growth continues to struggle in the UK. This comes amid a weakening job market and increased cost pressure for UK companies according to the S&P’s Global Composite PMI survey, where increased cost may be fed into consumer prices and could lead to inflation (increases in the average price). This environment may provide the foundations for stagflation. Stagflation is an economic environment where an economy faces lower demand alongside high inflation and high unemployment which often provides a tricky climate for policymakers to navigate. Policymakers typically struggle as high inflation is often tackled by policies which decrease demand and employment in the short run to ease price pressure, hence, in this case, policy makers tools are limited.  

If inflationary pressures persist and demand continues to weaken, the UK may be on a path toward this tricky economic state, demanding careful and innovative policy responses.

5. President Trump's Tariff Threats

President Trump has announced plans to impose "very serious tariffs" on imports from Canada and Mexico, citing concerns over subsidies and national security. Canada and Mexico are the U.S.’s top trading partners, with trade exceeding $1.5 trillion in 2023. Sectors such as agriculture, energy, and automobiles are particularly intertwined, and Trump's plans could disrupt these key supply chains.

Tariffs are taxes on imports designed to make foreign goods more expensive, encouraging consumers to buy domestic alternatives. While this can protect local industries, the economic downsides can be significant:

1. Higher Consumer Costs: Tariffs increase the cost of goods like cars and groceries, as businesses pass the added expense onto consumers. For instance, U.S. supermarkets could see higher prices for Mexican-grown avocados or tomatoes.

2. Trade Retaliation: Countries often respond to tariffs with their own. If Canada or Mexico impose counter-tariffs on U.S. agricultural exports, American farmers and businesses could lose access to key markets.

3. Global Supply Chain Disruption: Modern industries rely on cross-border trade for intermediate goods. Tariffs on Canadian lumber or Mexican auto parts would raise costs for U.S. industries, reducing their competitiveness in global markets.

4. Economic Growth Risks: Sustained trade conflicts can slow growth by reducing trade volumes and deterring investment. Studies show that tariffs often lower GDP for both the imposing and targeted countries over time.

As members of the USMCA trade agreement, Canada and Mexico are crucial to the U.S. economy. Disrupting these trade flows risks higher prices, supply chain inefficiencies, and strained diplomatic relations, potentially harming long-term economic stability.

While tariffs may offer short-term benefits to specific industries, they carry broader risks of inflation, retaliation, and slowed growth. For policymakers, the challenge lies in balancing domestic protection with global economic integration.

Conclusion

This week's events highlight the complex interplay between international relations, market competition, and economic policies. Understanding these developments helps us grasp how global economics affect our daily lives, from the prices we pay for goods to the health of our national economies.

Thank you for reading The Weekly Echo! Your feedback is valuable to us; let us know what topics you'd like us to cover in future editions.

Best wishes,

Harry & Reika

Co-Founders, Echonomics