Michelle ThompsonAs the trade war escalates, warnings of a global recession have been growing.
As of Wednesday night, the primary tension is between the US and China, with both countries imposing escalating tariffs on each other.
For most other nations, Donald Trump has delayed raising taxes on US imports for 90 days, meaning these countries will only face a reduced levy of 10%, the same rate Trump initially imposed on the UK last week.
While the UK seems to have avoided the worst compared to other economies, British exporters still face additional charges on goods sold to the US, and the UK will experience various other impacts, including on growth and inflation.
The precise effects remain uncertain, but some of the emerging consequences could potentially bring some benefits.
Business
British businesses most directly affected by the trade war include carmakers, food producers, and others selling goods to the US.
As American importers face a 10% increase in prices for these products, they must decide whether to absorb the cost, spread it across the supply chain, or pass it on to customers in the form of higher prices.
These companies are already at risk of losing sales due to tariffs, which threatens jobs and investment plans. Additionally, other businesses could face increased competition if cheaper imports from other countries are redirected to the UK, especially considering that China manufactures a third of global goods.
The interconnected nature of global supply chains also means that UK businesses will feel the ripple effects of tariffs in other countries.
Growth
The impact of trade-related growth in the UK is expected to be less severe than in other countries, partly due to the nature of what Britain exports to the US.
Two-thirds of British exports to the US are services, such as banking, insurance, and advertising, which are not subject to tariffs. This strength in services represents a key advantage for the UK’s trade portfolio.
However, this strength also presents potential vulnerabilities.
Certain services exports, like after-sales support or marketing, are linked to goods, meaning their demand could be impacted by US tariffs. Additionally, broader service export sales could suffer if demand from other countries declines.
The advertising sector is already concerned, as their services are often the first to experience cuts during budget reductions.
Furthermore, the UK’s trade success in services also exposes it to risks. The Bank of England has noted that the size of the UK’s export sector, particularly its financial services, makes it vulnerable to risks in financial stability, especially in the face of weaker global growth.
For these reasons, Chancellor Rachel Reeves has warned that UK growth will be affected, even with the current 10% tariff level, which aligns the UK with other nations.
This presents concerns not only for households and businesses but also for the Chancellor’s fiscal plans—slower growth places additional pressure on public finances.
As a result, there is speculation that more tax increases may be introduced in the Autumn Budget if she aims to meet her fiscal targets.
ISAs and pensions
The dilemma is further compounded by movements in the bond markets.
Bonds are typically considered safe investments during times of uncertainty, but there have been signs of significant selling, which could lead to higher borrowing costs for governments.
Additionally, the sharp fluctuations in global stock markets, driven by the heightened risk of a global recession, have not been favorable for UK investors.
When share prices fall, it reduces the value of products like ISAs and pension funds.
However, seasoned analysts note that these types of funds are long-term investments. The volatility in the value of investments tends to smooth out over time, and most people are not relying on these funds for daily expenses. Generally, UK households are less directly exposed to the stock market than their American counterparts.
Interest rates
There could be a silver lining to the current market volatility.
Prices for oil and commodities like copper and sugar have been declining, which may help lower inflation. Additionally, the diversion of cheap goods from countries struggling to sell in the US could further ease inflationary pressures.
In the face of weaker growth, investors are speculating that the Bank of England may cut interest rates up to four more times this year, offering potential relief for millions of households.
The Bank of England itself has highlighted that British households are well-positioned to handle the challenges, with debt relative to income at its lowest level since 2001.
Furthermore, the banking system, according to the Bank, is well-equipped to absorb shocks, having learned valuable lessons from the 2008 financial crisis.
So, while the UK’s growth is likely to be impacted by global uncertainties, there could still be some positive developments to watch for.
