Trump tariffs would halve UK growth and push up prices, says thinktank

 

Trump tariffs would halve UK growth and push up prices, says thinktank

 

NIESR warns British economy would be one of the worst affected by protectionist policies

 

Larry Elliott Economics editor

Wed 6 Nov 2024 11.48 CET

https://www.theguardian.com/us-news/2024/nov/06/donald-trump-tariffs-would-cut-uk-growth-by-half-and-push-up-inflation-thinktank-warns

 

UK growth is likely to be halved by Donald Trump’s victory in the US presidential race if goes on to impose the swingeing new tariffs he has threatened, a leading thinktank has warned.

 

The National Institute of Economic and Social Research (NIESR) said the protectionist measures planned by the Republican challenger for the White House would result in weaker activity, rising inflation and higher interest rates from the Bank of England.

 

Ahmet Kaya, a NIESR economist, said that, were Trump to go ahead with a 60% tariff on Chinese goods and a 10% tariff on goods from all other countries, the resulting trade war would lower UK growth by 0.7 percentage points and 0.5 percentage points in the first two years.

 

“The UK is a small, open economy and would be one of the countries most affected,” Kaya said. NIESR has estimated that over two years the UK inflation rate would be 3-4 points higher while interest rates would be 2-3 points higher.

 

In the absence of the Trump tariffs, NIESR forecast in a report published overnight before the election results came in that the UK would grow by 1.2% in 2025 and by 1.4% in 2026, inflation settling at close to the government’s 2% target, and official interest rates falling from their current level of 5% to 3.25%.

 

Kaya said the impact of the Trump measures would be more severe if the affected countries imposed tit-for-tat tariffs of their own. US growth would be reduced by about 1.3% to 1.8% in the first two years of the tariffs coming into force, depending on whether they prompted retaliation.

 

The thinktank expressed scepticism about the expected impact of last week’s budget on the long-term growth potential of the economy, which it puts at 1.2% a year.

 

Stephen Millard, NIESR’s deputy director for macroeconomic modelling and forecasting, said the boost to public infrastructure spending announced by Rachel Reeves would only make good the cuts announced by the previous government.

 

Reeves changed the way the government assesses whether the national debt is sustainable, and Millard said taking account of the state’s financial assets and liabilities would permit higher public investment.

 

“But exactly when and by how much remains to be seen. My hunch is that more needs to be done,” Millard said.

 

“Last week’s landmark budget – the first by a Labour chancellor in 14 years – will boost demand over the next couple of years, implying higher GDP growth and inflation, as well as slow down the fall in interest rates. And the rise in the employer rate of national insurance contributions will act to reduce job creation over the coming years, which will lead to greater unemployment.”

 

NIESR’s quarterly update on the state of the economy also said Reeves’s decision to keep the freeze on income tax allowances and thresholds in place until April 2028 would cost the poorest 15% of households £600 a year in extra tax.

 

The UK’s poorest families had been the hardest hit by the failure of wages to keep pace with rising prices during the cost of living crisis, resulting in a fall in their living standards of about 20% – or £2,500 – from 2021-22 to 2024-25.

 

While living standards were now rising again, on current trends it would not be until 2026 they were back to pre-2022 levels for the average family.

 

Adrian Pabst, deputy director for public policy, said: “The government’s focus on faster growth through greater investment is welcome, but some of the tax decisions risk discouraging more business investment while penalising low-income households.”

 

Rather than keep the personal tax thresholds frozen for another three and a half years, it would be better for the living standards of those households that had been hit hardest by the economic shocks over the past few years if the government had raised income tax for top earners while unfreezing the thresholds from 2025.

 

“It’s time to throw off the self-imposed fiscal straitjacket and do the right thing for the economy and society,” Pabst said.