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International trade

IMF Warns of Economic Risks from Trump's Trade Policy

Strategic Insights

— 2 min read

The International Monetary Fund (IMF) has issued a warning that President Trump's trade policy will have a negative impact on the UK economy, with a potential hit of 0.3 percentage points by next year. The economic uncertainty caused by Trump's protectionist measures, combined with slower activity in the UK's trading partners and the direct impact of remaining US tariffs on the UK, will put the government at risk of breaching its fiscal rules. The IMF has also warned that the government's limited headroom in meeting its fiscal strategy could lead to market pressures and make it harder to meet fiscal rules.

Key Takeaways:

  • The IMF estimates that President Trump's trade policy will knock 0.3 percentage points off the size of the UK economy by next year.
  • The UK's economy will suffer from the "persistent uncertainty, slower activity in UK trading partners and the direct impact of remaining US tariffs on the UK".
  • The government's fiscal strategy is at risk due to market volatility, trade uncertainty, and domestic spending pressures, with "significant risks to the [government's] successful implementation of the fiscal strategy".
  • Luc Eyraud, head of the IMF's UK mission, recommends that the chancellor "stay the course" on meeting her two fiscal rules and only review the government's headroom once a year to prevent market demands for more cuts or tax raises.
  • The government recorded £9.9 billion in headroom against its main fiscal rule at the spring statement in March, one of the lowest buffers on record.
  • The IMF proposes refinements to the fiscal framework, including a shift to one single fiscal event a year and de-emphasizing the limited fiscal headroom.
  • The IMF expects the Bank of England to cut interest rates by a quarter of a point every quarter until the end of 2026, supporting GDP growth.

Statistics:

  • FYI (Not provided, however in the article doesn't include specific please look at IMF statement)
  • The IMF has upgraded its growth forecast for the UK from 1.1 per cent to 1.2 per cent for this year.
  • The forecast for UK GDP growth for 2026 remains unchanged at 1.4 per cent.
  • The UK's GDP outperformance in the first quarter of the year was 0.7 per cent.
  • The IMF expects the Bank of England to cut interest rates by a quarter of a point every quarter until the end of 2026.
  • The UK-US tariff deal and recent agreements with India and the European Union will have a limited macroeconomic impact, according to the IMF.

Sources:

  • IMF, "IMF Press Release No. 19/106: IMF Completes 2019 Article IV Consultation with the United Kingdom"
  • "Hedge funds put UK at higher risk of gilts turmoil, IMF warns, Business, page 31"

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