Donald Trump‘s unprecedented tariffs have triggered mass panic on stock markets and warnings of a global recession that could hit the UK hard.
While it is difficult to see how the United States’ President’s trade war will play out, it is already creating a number of economic headaches for Sir Keir Starmer at a time when Britain’s economy was already stuttering.
Here are some of the issues the Prime Minister is facing:
The plunge in global equity markets triggered by Trump’s tariffs is believed to have wiped billions of pounds off the value of pension pots, which are typically invested in stocks and shares.
It means those looking to make big lump sum withdrawals now face taking home much less money than just a few weeks ago, prompting experts to advise those who can to wait until drawing down large sums of cash from their pension pots.
That might be putting off home extensions, big new purchases or less money for grandchildren’s university; all of which could have knock effects for people’s families and for the wider economy.
ISA plan in disarray
The Government has been planning to cut the £20,000 annual amount people can deposit into Cash ISAs – tax-free saving accounts – to as low as £4,000 in a bid to push savers towards their Stocks and Shares equivalent, where the money is invested in companies and funds, in a bid to boost economic growth and generate greater returns.
But with stock markets in freefall, Reeves is being urged by economists to rethink her plans as it will force savers to take risks with their money at a time of major uncertainty
Reeves is trying to pull every lever to boost flagging economic growth and having to reverse her plans on ISAs would damage this effort.
British firms exported £182bn-worth of goods to the US last year. They are all now being hit by 10 per cent tariffs from Donald Trump, when those products enter the US.
The tariff rate maybe lower than other American allies such as the EU or Japan. But it will still make UK products significantly more expensive in America, making it harder for firms to sell their products Stateside and potentially reducing profit margins.
And some sectors are being hit even harder.
UK car manufacturers face a 25 per cent tariff for all vehicles they send to the US. Starmer has taken rapid action to try and protect car industry, which counts the US as its second largest export market after the EU, with transatlantic trade worth £8.3bn. But one major firm – Jaguar Land Rover – has already paused exports as it takes stock of the situation.
Steel and aluminium are also facing higher 25 per cent tariffs, adding to the pressure on the UK’s domestic steelmaking which was already hanging by a thread after years of decline, as well as defence exports to America.
Other industries such as food and drink are also predicted to suffer and the levies could lead to job losses.
According to analysis from Deutsche Bank, Trump’s tariffs will put between 50,000 and 100,000 people out of a job in the UK.
At the same time, businesses from other countries may send products that were bound for the US to the UK and other countries with lower tariffs, and sell them at a cut price – a practice known as dumping.
Flooding the market with cheap goods may bring down prices for British consumers, at least in the short term, but it threatens to undercut UK businesses which could reduce profit margins and put more jobs in affected industries at risk.
Spending cuts
Whether or not Trump’s tariffs push the UK into recession, most economists predict they will deliver a sizeable blow to Britain’s already stuttering economic growth.
This threatens to wipe out the so-called “headroom” – or spare cash – Reeves has available to meet her fiscal rule on controlling Government borrowing.
The Chancellor is so far resisting calls to relax this rule, meaning that in her autumn Budget she may once again have to cut spending on welfare or public services – as she did just last month – to balance the books.
More cuts to Whitehall spending and benefits – many of which go to people in work – are likely to hit those already struggling to make ends meet and who are relying on increasingly stretched public services.
The other option available to Reeves if she wants to keep her fiscal rules in place is to raise taxes to generate more money for the Government.
Experts have explained that the best way to do this while protecting fragile economic growth would be by raising the basic rate of income tax or hiking VAT. But hitting people’s wallets in such a direct way could be politically difficult for a party which pledged not to raise taxes for working people.
The Chancellor also promised that she will not repeat last October’s Budget, which included £40bn of tax rises.
But Reeves has refused to rule out extending the freeze on income tax thresholds beyond 2028, despite having in October committed to ending it, which rasies the prospect of more people being pulled into paying higher rates of tax as their wages rise in the coming years.
Some Labour MPs want higher taxes on the rich, such as a wealth tax, but Reeves is believed to be reluctant.
However, having already grabbed some of the low hanging fiscal fruit by raising employers’ national insurance and capital gains tax, she may be forced to come up with alternatives.
Inflation
Some economists believe the tariffs could push up inflation in the UK, which is already stubbornly high. The National Institute for Economic and Social Research (NIESR) has said that inflation could rise as the tariffs could make the US dollar stronger than the British pound, making American imports more expensive.
This could add to the cost of living crisis as Britons already face rising bills for energy, water and council tax this month.
But on the slightly brighter side, others believe inflation could fall, so long as Starmer continues to resist retaliation against Trump by slapping tariffs on US imports to the UK.
The “dumping” of goods in the UK that overseas exporters are no longer able to send to the US, while bad for British firms, could also bring prices down.
This could mean the Bank of England reduces interest rates more quickly, bringing down mortgage costs.
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