Rachel Reeves is facing a major headache with the UK’s economy right now, but it could be about to turn into an international migraine as of next week.
Donald Trump will be officially inaugurated for his second term in office on Monday, bringing with him a set of isolationist economic policies which are expected to impact the rest of the world, including the UK.
The chancellor is already struggling as the long-term government borrowing hit a 27-year high on Monday while inflation continues rising – meaning more pressure on the public purse.
As she prepares to implement further spending cuts, Labour’s promises to grow the economy seem further away than ever – and that’s before the president-elect is even officially in power.
Here’s why Trump 2.0 will present another set of challenges for the Treasury.
Looming tariffs
Trump has promised to implement 10 to 20% tariffs on all goods coming into the US, a move which he claims will protect American jobs.
It will also force other countries to fall in line with his trade demands or face extra costs.
If Trump follows through on this threat, it would be a “doomsday scenario” for the UK, according to the chair of the Commons business and trade committee, Liam Bryne, as the US is the UK’s largest individual trading partner.
He told the Financial Times that the UK should try to maintain free trade by seeking an exemption.
In 2023, the US was the single biggest market for UK trade goods, buying around £60.4bn of British products.
Similarly, economics and public policy professor Jonathan Portes, from King’s College London, said the planned tariff increase would be “a severe shock to the global economy, including the UK”.
Higher tariffs could end up reducing company profits or increasing the price of UK goods in the US market, which might cut down on demand.
The National Institute of Economic and Social Research (NIESR) said it could reduce GDP growth by 0.7 percentage points in the first year and 0.5 percentage points in the second.
However, it’s worth putting any such impact into context.
The US currently makes up 10% of British goods imports, meaning tariffs may have less of an impact than expected.
When Trump last hiked tariffs in 2018, the UK mainly experienced a one-off rise in input costs.
But it remains unclear if the president will actually imposes any tariffs – and it was actually Trump’s volatility with US trade policies which troubled the UK markets most during his last presidency.
Luis Oganes, head of global macro research at investment bank JP Morgan told the BBC that the biggest issue for global growth is “uncertainty, and the uncertainty is coming from what may come out of the US under Trump 2.0”.
Inflation and borrowing woes
Trump’s policies – like tax cuts and increased government spending – are expected to push up inflation and drive up the US dollar.
The UK tends to follow the US when it comes to borrowing costs and those are already pretty high right now.
Over 35% of the UK’s current imports are paid in US dollars, so if the dollar goes up, the cost for the UK will go up. In turn, that could increase UK inflation over the next year, according to the financial advisers’ magazine, IFA.
The Bank of England might then have to hike up interest rates to counteract creeping inflation.
Compare My Move founder and MD Dave Sayce predicted that trade tariffs could therefore increase UK mortgage rates if they push inflation up.
He said: “The base mortgage rates and inflation are very closely related, with the Bank of England using the base rate to control inflation, meaning ordinary Brits will be paying more for their mortgage.”
China hawks
Trump has made his dislike of China painfully apparent over the years, which makes Reeves’ weekend trip to the east Asian country rather awkward, especially as she came away with £600m extra UK investment under her arm.
It means Trump – and his very vocal adviser Elon Musk – could soon launch a series of social media attacks on Labour for this apparent cosiness with Beijing.
However, the chair of the Confederation of British Industry (CBI), Rupert Soames told POLITICO that the UK should not be afraid of irking the president.
He said the China-US relationship is comparable to “two 500-pound gorillas staring at each other,” meaning the UK can be a “nimble, agile animal of a smaller size and maybe be part way between the two”.
Spending pressures
The US and the UK have often been in lockstep when it comes to security, but Trump is now suggesting it’s time for Nato members to hike their defence spending to 5% of GDP.
That would be more than double the amount the government is currently spending. Following through on such a promise could mean Labour have to other departments, like the NHS.
Amid concerns that Trump could pull the US out of Nato unless other member states start to pull their weight, the defence secretary John Healey insisted that the incoming president was “rightly pushed European nations to do more to fund” the alliance.
There’s also a risk Trump will pull military aid to Ukraine if the peace negotiations with Russia – which he has promised to implement – do not go to plan.
If so, the UK and other European allies could be expected to plug the hole in the Ukrainian finances.
Reeves already has little to no financial wriggle room – but it remains to be seen just how much Trump 2.0 will exacerbate the already-stretched British economy.
