Last week, the OBR shared the first draft of their official update on the forecasts set out in October’s Budget with the chancellor. Given that economists now broadly expect somewhere in the region of 1.2% growth in 2025 it is hard to imagine anything but some level of downward revision of the 2.0% previously mooted by the OBR.
Currently the highest estimate from any economist is from KPMG who predicted the economy to grow 1.7% in 2025. The lowest is from JP Morgan, who think it will be more like 0.7%.
This is in line with the Bank of England who, of course, slashed its growth forecast for 2025, from 1.5% to 0.75%, as it cut interest rates again in February.
Worryingly for Keir and co, anything in the region of a 0.5% downgrade would in theory wipe out the remainder of Reeves’ ‘wiggle room’ (in ‘A Place in the Sun‘ parlance!).
While there’s little, now, that would surprise from a Trump administration, many have been taken aback by the speed with which the president has begun slapping tariffs on China, Mexico and Canada. The proverbial, as they say, just got real.
And this has, no doubt, meaningfully altered the mood music. While Samuel L Jackson, during Kendrick Lamar’s half time Superbowl performance, may have opined “America wants slow chill music”, Trump is only likely to amp things up further.
The Republicans control the Senate and the House of Representatives. In Washington political parlance, it’s called “a governing trifecta”. Donald Trump is very much in charge, and more so than during his last sojourn at Pennsylvania Avenue.
The Bank of England hasn’t, yet, factored into its forecasts any possible effects of Trumpenomics and his trade tariffs
Between 2016 and 2020, despite all the hubris, very little of Trump’s agenda materialised. There are no excuses this time not to deliver on his promises, and he’s made a lot of them!
So, arguably, the most significant things to note from last week’s sobering MPC update was that the Bank of England hasn’t, yet, factored into its forecasts any possible effects of Trumpenomics and his trade tariffs (note to JK Rowling if she’s looking for her next saga).
Trump didn’t elaborate on his assertion that the UK was “out of line”, when talking to the BBC a couple of weeks back. Perhaps Kier knows what he’s done (what was he thinking serving up Coke Zero instead of Diet Coke!?). But Donald is keen to show he means business this time around.
Trump has already unveiled sweeping tariffs on goods imported from Canada, Mexico, and China which kicked in last week, and ordered a 25% import tax on all steel and aluminium entering the US in a major expansion of existing trade barriers, which is due to take effect from March.
He has also made it ominously clear that the European Union is in his sights. The US president said tariffs will “definitely” be placed on goods from the EU, saying America’s trade deficit with the bloc is “an atrocity” that means “they take almost nothing, and we take everything from them”.
But Britain appears to be getting some grace – for now – with the intimation that trade disputes with the UK can be ironed out.
At the heart of those disputes appears to be the question of trade surplus/deficit.
The US’s largest trade in goods deficit with a single country is with China, worth $279bn in 2023. This was followed by the EU, at $208bn.
The US is Britain’s largest single export market, worth £60.4bn in goods in 2023
However, taking account of services trade significantly reduces the deficit with the EU, because of large volumes of transatlantic trade in financial services, intellectual property and other professional sectors, the UK has a more balanced relationship with the US.
The US is Britain’s largest single export market, worth £60.4bn in goods in 2023, accounting for 15.3% of the global total. The UK imported £57.9bn in goods from the US.
Services trade is significantly larger, worth £126.3bn in exports from the UK to the US and £57.4bn in imports.
In a quirk caused by differences in data collection, the US and the UK report trade surpluses with one another. The UK reported a £71.4bn surplus with the US in 2023, while the US reported one worth £11.6bn with the UK.
Some economists are optimistic about the UK’s prospects as a result. And whilst the US is our largest individual trading partner, it still only accounts for around 10% of UK goods imports.
Furthermore, energy and other imports collectively comprise less than 40% of the UK’s Consumer Price Index (CPI) basket.
As a result, the effect on the general price level may also be less than feared – but it’s still more a case of ‘how bad’ it will be for UK inflation.
The National Institute of Economic and Social Research estimates a 10% tariff on all US imports – with retaliation from trading partners – could reduce global growth by about 1% over the next two years.
UK growth could also be dragged down by up to 0.7 percentage points in the first year, while inflation would be three to four points higher, and interest rates would be two to three points higher.
Borrowing costs for governments have also risen sharply in recent months amid investor fears over Trump’s tariffs stoking inflation. In the UK, borrowing costs have risen from 4.3% to 5.1% since September.
For the UK government, that presents the chancellor with a real dilemma before her spring statement on 26 March.
Like Kendrick Lamar, Rachel Reeves, who is watching daily as her fiscal headroom evaporates with every economic indicator, “Be lookin’ at the world like, ‘Where do we go?’”.
