President Trump’s trade policy will knock 0.3 per cent off the size of the UK economy by next year, according to the International Monetary Fund, which warned that global uncertainty puts the government at risk of breaching its fiscal rules.
The IMF said the UK would suffer from the “persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK” after Trump has threatened countries with sweeping protectionism since April 2.
Trade uncertainty, market volatility that raises the government’s borrowing costs, and domestic spending pressures mean there are “significant risks to the [government’s] successful implementation of the fiscal strategy,” the IMF said after completing its annual health check of the UK economy.
“Materialisation of these risks could result in market pressures, put debt on an upward path, and make it harder to meet the fiscal rules, given limited headroom.”
Luc Eyraud, head of the IMF’s UK mission, said the chancellor should “stay the course” on meeting her two fiscal rules and recommended only one review of the government’s headroom when the budget is held once a year.
This would help “de-emphasise” the limited fiscal headroom and prevent the government from responding to market demands for more cuts or tax raises, Eyraud said. 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.
“We are proposing refinements [to the fiscal framework,” Eyraud said. “A critical part is the shift to one single fiscal event a year … which is something we see in other countries. There is still market pressure for more frequent policy changes outside the fiscal event.”
The IMF, which published its initial findings from its Article IV assessment of the economy, lifted the forecast for UK GDP growth for this year from 1.1 per cent made last month to 1.2 per cent. The projection for 2026 was unchanged at 1.4 per cent.
The upgrade was based largely on a 0.7 per cent GDP outperformance in the first quarter of the year, and growth would be supported by interest rate cuts. The IMF said it expected the Bank of England to cut interest rates by a quarter of a point every quarter until the end of 2026.
The fund said its 0.3 per cent hit to the economy was based on a US tariff baseline of 10 per cent on major trading partners. It said the UK-US tariff deal and recent agreements with India and the European Union were welcome but would not have a “large macroeconomic impact”.
The growth outlook was at risk from “persistent global trade uncertainty … weakening global economic activity, disrupting supply chains, and undermining private investment”.
The fund offered broad praise for Labour’s plans to boost economic growth and productivity through planning reforms and investment — measures it said would deliver a growth lift that would outweigh the negative impact of planned tax rises “if properly implemented”.
The Guardian has reported that the Treasury is in a standoff with some ministers over proposed cuts to public services including policing and social housing. HMRC is also said to be exploring a shake-up of the salary sacrifice systems used by employees at about half of British companies, as part of attempts to shore up the public finances, according to The Daily Telegraph.
Rachel Reeves, chancellor, said: “The UK was the fastest-growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast.
“We’re getting results for working people through our Plan for Change — with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the national living wage, and wages beating inflation by £1,000 over the past year.”
