There is so much uncertainty that it is hard to bolt down even the most direct implications, but we know enough about the ways in which the world economy responds to shocks at least to know the questions.
Whether this will push us into a recession, defined by two successive quarters of negative growth, is not certain. But since our growth has been pretty anaemic since autumn last year it is quite possible.
The next question is what about financial wealth – does the plunge on the stock market matter? The best answer to that is say yes, but note that share prices have always recovered in the past and that in any case most owners of financial assets don’t need to sell. And shares also bring in dividends.
No one can know how far share prices will fall, but the FTSE100 index of large UK companies is about seven per cent down so far this year and 3 per cent down on where it was in April 2024. US equity markets are down further, but bond prices both here and in the US are broadly where they were a year ago.
How house prices will be affected
Looking ahead, there will be several conflicting forces. One will be what happens to employment – and unemployment. The Office for Budget Responsibility’s latest forecast expects a small rise in unemployment, but nothing disastrous. That’s on the assumption of growth of 1 per cent this year, so if there is a recession then unemployment would climb more swiftly. Some people might have to sell their homes, depressing prices.
Here, in theory at least, tariffs will increase inflation, but we really don’t know how significant that impact will be. After all, the oil price at $60 a barrel on the Brent measure is the lowest it has been since February 2021. That helps hold down inflation more generally.
The end result
If that sounds over-optimistic, consider this. The population of the UK is rising, and we don’t have enough homes already. We are starting to build more, for housing stocks are rising, but given the huge backlog it will be many years before we have more homes than the market wants. A global trade war won’t change that basic maths of supply and demand.
Need to know
In times like this, you have to keep asking: what could go really wrong? My own working assumption is that there will be some sort of settlement between the UK, Europe and other US allies. There will be two or three months of negotiations but an agreement is so overwhelmingly in the self-interest of the US, let alone the rest of us, that there will be a deal. What happens afterwards to the negotiations with China is another matter.
One shouldn’t get too worried about any one day’s movement on the markets, but until gilt yields come down soon, there will be serious disruption in UK finances. It is not just a question of Rachel Reeves missing her targets, troubling though that would be.
I’m not worried about a bear market in the US. They come along about every three-and-a-half years, and on average last only about nine months. There is a good crib on that here. But soaring long-term bond yields should be a real worry for all.
Actually, the overall debt position of the UK is not too bad, so no doom loop there. But the US depends on the rest of the world to finance its current account deficit and its fiscal one. In theory, tariffs will help tackle the first. But they may undermine – actually probably will undermine – the willingness of international investors to hold dollar assets. A run on the dollar? I don’t think so, but as I noted above we should keep on asking whether we might be wrong.
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