Should we fear Trumponomics? What tariffs could mean for the US, UK, EU, China and the world

Published

3 months ago

November 4, 2024

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There’s fear in some quarters of another Donald Trump presidency but will the economics be that bad?

Not a single vote has been counted but the policies of a possible second Trump presidency have already influenced financial markets.

The cost of US and UK borrowing – measured through 10-year revenue-raising instruments called bonds – has been upped as traders eyed the price-rising impact a Trump presidency could have on the world’s biggest economy.

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A signature policy of his – tariffs – could make things worse for US consumers, in turn hurting the world economy of which the UK is a part.

Precise detail on what tariffs Trump would apply on what goods and from where remains to be seen. He’s said all goods coming into the country could be slapped with a 10% tax.

Goods from China are going to be particularly hit with an anticipated 60% levy.

Why tariffs?

The hope is that by making imports more expensive goods made in the US will be more competitive and comparatively cheaper. More people would buy those things and life would be better for US producers, the thinking goes.

If US producers are doing well, they’ll hire more people, Trump expects. He’s calculating that more people working for US companies doing well will make for a strong economy and happy voters.

Parts of America have been severely impacted by factory closures as companies move to parts of the world with cheaper wages and operating costs.

This accelerated since the 1990s when the North American Free Trade Agreement (NAFTA) made it easier and cheaper to export to the US, reducing the incentive to produce in the country.

Blue-collar workers, traditionally not college-educated, lost and continue to lose out majorly from plant closures. These are the voters Trump is targeting and who form his base of support.

It’s worth noting Trump isn’t the only fan of tariffs with the Biden administration implementing them on Chinese electric cars, solar panels, steel and aluminium as it sought to protect the investment it had made in such industries from cheap and heavily subsidised goods.

What will the effect be?

China, unsurprisingly, will be levied the highest and experience the greatest direct strike.

The hit will be “notably negative”, according to analysis from the National Institute of Economic and Social Research (NIESR), a leading thinktank.

It will face short-term pressures on manufacturing and trade with its gross domestic product (GDP) – the measure of everything produced in the country – to fall about 1% a year for two years, NIESR says.

Economists at Capital Economics quantify the cost at about a 0.5% to 0.7% reduction in GDP.

The US

That said the effects will be felt most keenly by those living in the US who will pay more.

If usually cheap imported goods get pricier that probably will cause the overall rate of inflation to rise.

Here the knock-on influences emerge. Higher inflation will just mean more expensive borrowing through upped interest rates as the US central bank, known as the Fed, will act to reduce inflation.

There’s no mystery around how high interest rates can weigh on an economy, the literal goal of hiked rates is to suppress buying power and to take money out of the economy.

Fears of the US ending up in recession spooked stock markets and triggered a global sell-off just three months ago.

Stock prices can seem nebulous but they impact the value of most people’s pensions.

A recession isn’t predicted but the US economy will falter, NIESR says.

Economic growth in America, as measured by GDP, would decrease by around 1.3 to 1.8 percentage points over the next two years, depending on whether the countries it trades with retaliate, upping their own duties on US goods.

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Worldwide reverberations

As tariffs make exporting less favourable exporters will simply export less, meaning less is produced and the worldwide economy slows.

The blow to the global economic output could be a 2% GDP drop after five years of Trump being in office, according to NIESR.

The consequences of Trump tariffs won’t just be short-term, NIESR forecasts, with global GDP still lower than it would have been without the imposition even in 15 years’ time.

Specific countries will be hit worse than others: Mexico and Canada for whom the US makes up roughly 80% and 50 % of trade, respectively will experience the greatest pain.

The EU

It doesn’t look too bad for the European Union (EU) by comparison and could even be good for the bloc, some say.

NIESR reckons the euro area will be less badly affected than the UK over five years but the immediate impact will be worse.

The good news first: if Trump doesn’t lean too heavily into tariffs and focuses more on cutting taxes to grow the economy that bump could lead to stronger demand for European goods, notwithstanding import levies, suggests research from economic advisory firm Oxford Economics.

The bad news: it won’t look so good if the US economy turns bad through more aggressive policies like high tariffs on more goods, the firm says. That would mean a “large” fall in European exports, it adds.

And finally, some neutral news: not even high tariffs would be inflationary for the continent, Oxford Economics expects. Reduced demand and lower goods prices would just offset the higher import costs, it says.

Another firm, Capital Economics, also isn’t too concerned about the European economy under Trump.

“Smaller than many fear”, is how it described the suspected short-term macroeconomic consequences.

What about the UK?

It’s got to be bad for the UK, right? The US is the country’s biggest trading partner after all, making up just under 20% of our trade

Again, not so. The UK doesn’t even make it into the top 10 worst-affected countries under NIESR’s research.

Capital Economics anticipates the knock would be small and maybe even positive, though inflation may be higher than if there were no second Trump administration.

But there’s no consensus on this point with NIESR forecasting GDP will be lower because of fewer exports and higher global interest rates.

This downturn would slow UK exports to other countries, NIESR says.

NIESR estimates UK GDP could be between 2.5% and 3% lower over five years and 0.7% lower in 2025. So instead of the 1.5% rate of GDP predicted by the IMF for next year, the economy would grow by 0.5%.

Business

Asda-owner TDR snaps up former SPAC merger target CorpAcq

Published

8 hours ago

January 19, 2025

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Asda-owner TDR snaps up former SPAC merger target CorpAcq

The private equity owner of Asda has struck a deal to buy a controlling stake in a group which specialises in backing British SMEs.

Sky News has learnt that TDR Capital has agreed to acquire a majority interest in CorpAcq, less than six months after the so-called ‘corporate compounder’ aborted a deal to list in the US.

City sources said this weekend that CorpAcq, which makes roughly £125m in annual profit, was being valued at well over £1bn on an enterprise value basis in the deal with TDR.

Founded in 2006, CorpAcq – which sponsors Sale FC Rugby’s stadium, near its Altrincham base – has amassed a portfolio of more than 40 companies.

It specialises in buy-and-build strategies, with a focus on companies operating in the industrial products and services sectors.

The company’s acquisition blueprint enables SME founders to retain management control while gaining a long-term investment partner offering operational support to those businesses.

CorpAcq’s founder is Simon Orange, brother of the former Take That member Jason and joint-owner of the Sale Sharks.

In 2023, a special purpose acquisition company (SPAC) founded by Michael Klein, one of Wall Street’s leading financiers, announced a $1.5bn plan to take CorpAcq public.

The merger was called off in August last year, with Mr Klein’s vehicle Churchill Capital VII citing difficult IPO market conditions.

Banking sources said that TDR and CorpAcq had entered discussions well after the SPAC deal was abandoned.

The deal, which could be announced within weeks, is the latest to be struck by TDR, which also counts the pubs giant Stonegate and David Lloyd Leisure among its portfolio of investments.

A spokesman for TDR declined to comment.

Business

Poundland owner drafts in advisers amid discounter crisis

Published

1 day ago

January 18, 2025

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Poundland owner drafts in advisers amid discounter crisis

The owner of Poundland, one of Britain’s biggest discount retailers, has drafted in City advisers to explore radical options for arresting the growing crisis at the chain.

Sky News has learnt that Pepco Group, which has owned Poundland since 2016, has hired consultants from AlixPartners to address a sales slump which has raised questions over its future ownership.

City sources said this weekend that the crisis would prompt Pepco to explore more fundamental for Poundland, including a formal restructuring process that could prompt significant store closures, or even an attempt to sell the business.

AlixPartners is understood to have been formally engaged last week, with options including a company voluntary arrangement or restructuring plan said to have been floated by a range of advisers on a highly preliminary basis.

Sources close to the group said no decisions had been taken, and that the immediate focus was on improving Poundland’s cash performance and reviving the chain’s customer proposition.

A sale process was not under way, they added.

Poundland trades from 825 stores across the UK, competing with the likes of Home Bargains, B&M and Poundstretcher, as well as Britain’s major supermarket chains.

Last year, the British discounter recorded roughly €2bn of sales.

It employs roughly 18,000 people.

Earlier this week, Pepco Group, the Warsaw-listed retail giant which also trades as Pepco and Dealz in Europe, said Poundland had seen a like-for-like sales slump of 7.3% during the Christmas trading period.

In its trading statement, Pepco said that Poundland had suffered “a more difficult sales environment and consumer backdrop in the UK, alongside margin pressure and an increasingly higher operating cost environment”.

“We expect that the toughest comparative quarter for Poundland is now behind us – the same quarter last year represented a period prior to the changes made within our clothing and GM [general merchandise] ranges – and therefore, we expect the negative sales performance for Poundland to moderate as we move through the year.”

It added that Poundland would not increase the size of its store portfolio on a net basis during the course of this year.

“We are continuing a comprehensive assessment of Poundland to recover trading and get the business back to its core strengths, including undertaking a thorough assessment of all costs across the business, as well as evaluating its overall competitive positioning,” it added.

The appointment of AlixPartners came several weeks after Stephan Borchert, the Pepco Group chief executive, said he would consider “every strategic option” for reviving Poundland’s performance.

He is expected to set out formal plans for the future of Poundland, along with the rest of the group, at a capital markets day in Poland on 6 March.

Among the measures the company has already taken to halt the chain’s declining performance have been to increase the range of FMCG and general merchandise products sold at its traditional £1 price-point.

Poundland’s crisis contrasts with the health of the rest of the group, with Pepco and Dealz both showing strong sales growth.

A spokesman for Pepco Group, which has a market capitalisation equivalent to about £1.7bn, declined to comment further on the appointment of advisers

AlixPartners also declined to comment.

Business

FTSE 100 closes at record high

Published

2 days ago

January 17, 2025

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The UK’s benchmark stock index has reached another record high.

The FTSE 100 index of most valuable companies on the London Stock Exchange closed at 8,505.69, breaking the record set last May.

It had already broken its intraday high at 8532.58 on Friday afternoon, meaning it reached a high not seen before during trading hours.

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The weakened pound has boosted many of the 100 companies forming the top-flight index.

Why is this happening?

Most are not based in the UK, so a less valuable pound means their sterling-priced shares are cheaper to buy for people using other currencies, typically US dollars.

This makes the shares better value, prompting more to be bought. This greater demand has brought up the prices and the FTSE 100.

The pound has been hovering below $1.22 for much of Friday. It’s steadily fallen from being worth $1.34 in late September.

Also spurring the new record are market expectations for more interest rate cuts in 2025, something which would make borrowing cheaper and likely kickstart spending.

What is the FTSE 100?

The index is made up of many mining and international oil and gas companies, as well as household name UK banks and supermarkets.

Familiar to a UK audience are lenders such as Barclays, Natwest, HSBC and Lloyds and supermarket chains Tesco, Marks & Spencer and Sainsbury’s.

Other well-known names include Rolls-Royce, Unilever, easyJet, BT Group and Next.

FTSE stands for Financial Times Stock Exchange.

If a company’s share price drops significantly it can slip outside of the FTSE 100 and into the larger and more UK-based FTSE 250 index.

The inverse works for the FTSE 250 companies, the 101st to 250th most valuable firms on the London Stock Exchange. If their share price rises significantly they could move into the FTSE 100.

A good close for markets

It’s a good end of the week for markets, entirely reversing the rise in borrowing costs that plagued Chancellor Rachel Reeves for the past ten days.

Fears of long-lasting high borrowing costs drove speculation she would have to cut spending to meet self-imposed fiscal rules to balance the budget and bring down debt by 2030.

Long-term government borrowing had reached a high not seen since 1998 while the benchmark 10-year cost of government borrowing, as measured by 10-year gilt yields, was at levels last seen around the 2008 financial crisis.

The gilt yield is effectively the interest rate investors demand to lend money to the UK government.

Only the pound has yet to recover the losses incurred during the market turbulence. Without that dropped price, however, the FTSE 100 record may not have happened.

Also acting to reduce sterling value is the chance of more interest rates. Currencies tend to weaken when interest rates are cut.