Britain’s economy will be among the hardest hit by the global trade war and inflation is set to climb, the International Monetary Fund (IMF) has warned – as it slashed its UK growth forecast by a third.

In a sobering set of projections, the Washington-based organisation said it was grappling with “extremely high levels of policy uncertainty” – and the global economy would slow even if countries manage to negotiate a permanent reduction in tariffs from the US.

Echoing earlier warnings about the risks to the global financial system, the IMF said stock markets could fall even more sharply than they did in the aftermath of Donald Trump‘s “Liberation Day” tariffs announcement, when US and UK indices recorded some of their largest one-day falls since the pandemic.

It comes as Chancellor Rachel Reeves prepares to meet her US counterpart Scott Bessent at the IMF’s spring gathering in Washington this week.

She is hoping to negotiate a reduction to the 10% baseline tariff the US president has applied to all UK goods. Steel, aluminium and car exports face an additional 25% tariff.

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HARD TO SEE A WIN FOR REEVES AHEAD

Gurpreet Narwan

Business and economics correspondent

@gurpreetnarwan

As long as the world’s two largest economies are at war with each other, there will be considerable spillovers. The US and China account for 43% of the global economy.

If demand in either nation slows, that has ripple effects across the world. Tariff or no tariff, exporters to those markets will be hurt.

If China redirects its goods elsewhere, that could hurt domestic industries – jobs could be at stake.
US and Chinese investors might hit pause on global projects and stock market devaluations could hurt consumer confidence. Things could unravel quickly.

Against that backdrop, it is difficult to say with any certainty what would happen to the UK but, even if we find a way to sweet talk our way out of tariffs, the dark clouds of the global economy are moving in every direction.

Britain is an open and highly trade-sensitive economy (we have a trade-to-GDP ratio of around 65%) and global spillovers will rain on us.

Then there are the spillovers from the financial markets. The IMF warned that rising government borrowing costs were weighing on economic growth.
While rising UK bond yields are, in part, a reflection of investor unease over the UK’s growth and inflation outlook, they also reflect anxiety over the US trajectory.

It’s worth bearing all of this in mind if Chancellor Rachel Reeves emerges from her trip to Washington with a deal.

The Treasury would no doubt celebrate the achievement. After all, a reduction in tariffs could make a big difference to some industries, especially our car manufacturers who are currently grappling with a 25% levy on goods to their largest export market. However, it would not solve our problems.

In fact, it would barely make a difference to our overall GDP. Back in 2020, the government estimated that a free trade deal with the US would boost the UK economy by just 0.16% over the next 15 years.

And overall GDP does matter. The chancellor desperately needs economic growth to support the country’s ailing public finances (when the economy grows, so do government tax receipts).

She will know better than most that the prize the US has to offer is comparatively small, so she should weigh up the costs of any deal carefully.

The IMF presented a range of forecasts in its latest World Economic Outlook. Its main case looked at the period up to 4 April, after Mr Trump announced sweeping tariffs on countries across the world, ratcheting up US protectionism to its highest level in a century.

If the president were to revert to this policy framework, global growth would fall from 3.3% last year to 2.8% this year, before recovering to 3% in 2026.

In January, the IMF was predicting a rate of 3.3% for both years.

Nearly all countries were hit with downgrades, with the US expected to grow by just 1.8% this year, a downgrade of 0.9 percentage points.

Mexico was downgraded by 1.7 percentage points, while China and Canada are forecast to slow by 0.6 percentage points and Japan by 0.5 percentage points.

The UK economy is expected to grow by just 1.1% this year, down 0.5 percentage points from the 1.6% the IMF was predicting in January. Growth picks up to 1.4% next year, still 0.1 percentage points lower than the January forecast.

Along with recent tariff announcements, the IMF blamed the UK’s poor performance on a rise in government borrowing costs, which has in part been triggered by growing unease among investors over the fate of the US economy.

When borrowing costs rise, the chancellor has to rein in public spending or raise taxes to meet her fiscal rules. That can weigh on economic growth.

It also pointed to problems in the domestic economy, mainly “weaker private consumption amid higher inflation as a result of regulated prices and energy costs”.

In a blow to the chancellor, the IMF warned that the UK would experience one of the largest upticks in inflation because of utility bill increases that took effect in April.

It upgraded its inflation forecast by 0.7 percentage points to 3.1% for 2025, taking it even higher above the Bank of England’s 2% target and deepening the dilemma for central bankers who are also grappling with weak growth.

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Can Reeves come up trumps in Washington?
Trump’s tariffs to have major global impact

Meanwhile, inflation in the US is likely to jump one percentage point higher than previously forecast to 3% in 2025 on the back of higher tariffs.

The IMF forecast period ended on 4 April. That was before the US president paused his reciprocal tariffs on countries across the world while ratcheting up levies on China.

In a worrying sign for finance ministers across the world, as they attempt to negotiate a deal with the US administration, the IMF said the global economy would slow just the same if Mr Trump were to make his temporary pause on reciprocal tariffs permanent.

That is because higher tariffs between the US and China, which together account for 43% of the global economy, would have spillover effects on the rest of the world that offset the benefits to individual countries.

“The gains from lower effective tariff rates for those countries that were previously subject to higher tariffs would now be offset by poorer growth outcomes in China and the United States – due to the escalating tariff rates – that would propagate through global supply chains,” the IMF said.

In response, Chancellor Rachel Reeves said:

“This forecast shows that the UK is still the fastest-growing European G7 country. The IMF have recognised that this government is delivering reform which will drive up long-term growth in the UK, through our plan for change.

“The report also clearly shows that the world has changed, which is why I will be in Washington this week defending British interests and making the case for free and fair trade.”

Financial markets have priced in a 100% chance of a Bank of England interest rate cut next month, as the effects of Donald Trump’s evolving trade war continue to play out in the global economy.

LSEG data early on Tuesday had shown an 82% likelihood of a reduction from 4.5% to 4.25% on 8 May.

But the doubt disappeared shortly after remarks on inflation by a member of the rate-setting committee.

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Megan Greene, who voted with the majority for a hold at the last meeting in March, told Bloomberg that US trade tariffs are more likely to push down on UK inflation than raise the pace of price increases.

Her argument is essentially that the UK’s decision not to respond to Trump’s import duties through reciprocal tariffs could make the UK a destination for cheaper goods from Asia and Europe.

“The tariffs represent more of a disinflationary risk than an inflationary risk,” she said, adding: “There’s a ton of uncertainty around this, but there are both inflationary and disinflationary forces.”

Ms Greene also said that a recent surge in the value of the pound against the US dollar could also help ease inflation but cautioned that it was early days to determine the likely currency path.

The Bank is expecting inflation to rise this year despite a greater than expected dip witnessed in March largely due to the impact of rising energy prices but also the effects of tax rises on businesses from April.

Read more:
UK will be among ‘hardest hit’ in trade war

The trade war is widely tipped to weigh on economic activity globally.

It poses a problem for the Bank as rising inflation curbs policymakers’ ability to help boost growth through interest rate cuts.

The LSEG data further showed that financial markets are expecting three Bank of England rate cuts by the year’s end.

The Bank’s counterpart for the euro area has been cutting rates at a faster pace as inflation has allowed, due to the dire performance of its collective economy.

Like in the UK, the US central bank has also been taking a cautious approach to rate cuts recently due to the spectre of domestic inflation arising from the Trump trade war.

A perceived failure of the Federal Reserve to address an anticipated growth slowdown, largely arising from the imposition of tariffs, has angered the president.

Mr Trump declared last week that the bank’s chair, Jay Powell, should be fired and demanded a rate cut “NOW” in a social media post.

Chancellor Rachel Reeves is in Washington this week for a series of meetings but is expected to hold discussions with her US counterpart on a trade agreement to nullify the need for US/UK tariffs.

Any rate cut by the Bank of England would be a welcome boost in her push for economic growth in troubled times for the world trade order.

A woman who claimed to be Madeleine McCann has pleaded not guilty to stalking the missing girl’s parents.

Julia Wandel, 23, is accused of making calls, leaving voicemails, and sending a letter and WhatsApp messages to Kate and Gerry McCann.

Wandel, from southwest Poland, is also accused of turning up at their family home on two occasions last year and sending Instagram messages to Sean and Amelie McCann, Madeleine’s brother and sister.

It is alleged she caused serious alarm or distress to the family between June 2022 and February this year when she was arrested at Bristol Airport.

She claimed to be Madeleine on Instagram in 2023, but a DNA test showed she was Polish.

Karen Spragg, 60, who is alleged to have made calls, sent letters and attended the home address of Mr and Mrs McCann, also denied a charge of stalking at Leicester Magistrates’ Court.

Wandel was remanded back into custody while Spragg, from Caerau in Cardiff, was granted conditional bail.

Both women are due to appear at Leicester Crown Court for trial on 2 October.

Madeleine’s disappearance has become one of the world’s most mysterious missing child cases.

She was last seen in Portugal’s Algarve in 2007 while on holiday with her family.

Her parents had left her in bed with her twin siblings while they had dinner with friends at a nearby restaurant in Praia da Luz when the then three-year-old disappeared on 3 May.

A man suspected of kidnapping Madeleine will not face any charges in the foreseeable future, a prosecutor told Sky News earlier this year.